United States: Anything Is Possible ‒ The Trump Administration And Estate Tax Repeal

Will the election of Donald Trump and Republican control of both houses of Congress bring with it the repeal of the estate tax? If so, should you begin planning (or not planning) accordingly?

As a candidate, Donald Trump made ending the estate tax a key component of his tax reform plan. In place of the estate tax, he proposed that the built-in capital gains of a decedent's assets in excess of $10 million be subject to a 20 percent tax. While one's initial reaction may be that less estate planning is now needed, the following observations should be kept in mind:

  • Even with a Republican controlled Congress, estate tax repeal is uncertain. Pay-as-you-go budgeting rules, the lack of a sixty Republican senator super-majority and the general delays inherent in the legislative process may prove to be formidable obstacles to estate tax opponents.
  • The estate tax has been repealed previously. The Economic Growth and Tax Relief Reconciliation Act of 2001 was the result of a bipartisan compromise of a Republican controlled House of Representatives, an evenly divided Senate and Republican President George W. Bush. While the Republican goal was estate tax repeal, the end result was a gradual increase in the estate tax exemption amount culminating in a one-year-only repeal of the estate tax in 2010.
  • "Permanent" estate tax repeal may prove to be not so permanent. Even a permanently repealed estate tax could be reinstated under a future Congress and President. Such reinstatement would likely be part of any future Democratic President's tax reform plan. For example, both Hilary Clinton and Bernie Sanders proposed a reduction in the estate tax exemption amount and an increase in the estate tax rates as part of their tax reform proposals.
  • Many states will continue to levy an estate tax even if the federal government does not. Residents of New York, New Jersey and many other states who died in 2010 were subject to state level estate taxes notwithstanding the federal estate tax repeal in effect that year. The imposition of state estate taxes would likely continue in many states notwithstanding federal estate tax repeal.
  • Treasury regulations have recently been proposed that may increase the effective gift, estate and generation-skipping transfer taxes on transfers to family members of interests in family-controlled entities. It is now doubtful these proposed regulations will be finalized in their current form; however, if particular provisions of the proposed regulations are adopted, valuation discounts associated with certain wealth transfer tax planning techniques (e.g., the transfer of an interest in a closely held business) may no longer be available. As a result, completing lifetime wealth transfer planning prior to the imposition of these changes may be advisable.
  • Even if the estate tax is repealed, the gift tax will likely remain in effect. The gift tax is viewed as a backstop to both the estate tax and the income tax, as it inhibits the ability to shift low basis assets to family members in a lower tax bracket. As a result, even if the estate tax is repealed, it is likely that the gift tax will remain in effect, as it did in 2010. Undertaking current estate planning may provide a pool of funds available to descendants in the future without incurring gift tax at such time.

With these factors in mind, savvy clients are looking for more useful advice than just "Stay healthy." Certain planning may be undertaken now to protect an individual's estate against costly future estate, gift or capital gains taxes, without forfeiting the benefits from potential estate tax repeal. For example, currently available valuation discounts can be combined with estate freeze techniques to remove assets from the reach of both federal and state taxes, without incurring a current gift tax. Furthermore, regardless of the legislation that may be enacted by the incoming administration, the estate tax regime that will be in effect at the time of an individual's death is unknown. Such uncertainty should inspire thoughtful consideration and prudent action.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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