With the election of Donald Trump as the 45th President of the United States, the prospect of tax reform, and specifically repeal of the Federal estate tax has become more plausible. Repeal of the Federal estate and generation-skipping transfer tax was part of the “Blueprint” for tax reform announced by Republicans in June 2016. Predicting what will happen, when it will happen, and what form it will take are difficult. If repeal occurs:
- Will repeal happen all at once, or be phased in?
- Will the gift tax also be repealed?
- Will repeal be “permanent?” Or will it “sunset,” much like the repeal that occurred in 2010?
- Will the estate tax be replaced with a different system, such as payment of capital gains tax at death, like the Canadian system, or a “carry-over” basis regime, as in 2010?
- How soon is any such legislation likely to be passed?
All any of us can do is guess. But the fact remains that people want, in fact, need, to create estate plans now despite the uncertainty of what may happen in the future. So what do you do now?
- Continue to implement solid estate plans. Not having a plan could be much worse than having to “tweak” a plan later because of changes in the law. What if you die or become incapacitated before any change in the law occurs? In that event, waiting could be disastrous.
- Would you change anything about your plan if the estate tax were repealed? In many cases, the answer would be “no.” As long as there are children and grandchildren, parents and grandparents are going to create trusts. While trusts can provide tax savings, one of the primary reasons for using a trust is for protection: protection of trust beneficiaries from themselves, from their creditors, and from their spouses in the event of divorce. A trust provides a mechanism for professional management of assets, whether because the beneficiaries are unable, due to age, disability or lack of skill, or unwilling to engage in the work necessary to manage trust assets.
- Build flexibility into those parts of your plan you might want to change if the estate tax were repealed. For instance, if you would give more to your family and less to charity if the estate tax were repealed, you could create contingent distributions in your plan in that event.
- Continue to take advantage of “low-risk low cost” planning opportunities. Techniques such as Grantor Retained Annuity Trusts (“GRATs”) and sales to (Intentionally Defective) Grantor Trusts (“IDGTs”) can be used in a manner that minimizes taxable gifts and removes future appreciation from your estate. Concerns about replacing the estate tax with capital gains tax can be minimized by using some of the flexible provisions included in such trusts, such as the power to substitute trust assets with different assets having an equivalent value.
In summary, implementing a solid estate plan now instead of waiting to see what happens in many cases will be the best approach.