President-Elect Trump campaigned on the promise to repeal the federal estate tax. In addition, it has been in the Republican platform and prior bills by Republican Congressmen to repeal the estate tax. While it is uncertain if the estate tax repeal will be included in the final tax reform passed by the Congress and signed by the President next year, there is a very low probability that the estate tax rate would be increased or the estate tax exemption would be decreased with the incoming Administration.
Under current estate tax rules, upon death, the cost basis of the decedent’s assets are adjusted, either upward or downward, to their fair market value at death. For appreciated assets, this typically reduces the income tax on the capital gain upon a subsequent sale. Included in the estate tax proposals of President-Elect Trump, would eliminate this step-up in basis adjustment for those estates that exceed $10 million or on small businesses and family farms. If there is no longer a basis adjustment at death this would mean that beneficiaries who inherit appreciated assets would inherit the unrealized capital gain to be recognized only if and when such assets are eventually sold.
In a prior communication, we had written about the proposed IRS regulations aimed at reducing or eliminating valuation discounts for family businesses and family controlled entities. It was thought that these regulations might be finalized before the end of the year and would be effective when finalized. The reduction or elimination of valuation discounts would be inconsequential if the estate tax was repealed. In addition, due to recent remarks by IRS representatives and the numerous comments the IRS has received in response to the proposed regulationsist expected that the proposed regulations will not be finalized until 2017. Therefore, if you are considering gifts or other transactions to reduce the impact of those regulations, you may want to reconsider such planning before the end of the year. However, this planning may still be valuable for other non-tax reasons and you should contact your Withum tax advisor to discuss your specific circumstances.
As the details of the future estate tax legislation is not certain at this time, it would be prudent for high net worth individuals to pause and take a wait-and-see mode to determine if gift planning still makes sense. As in prior years, there is not a looming deadline of a possible reduction of gift exemption and it does not appear that if current action must be taken or risk losing an estate tax savings opportunity. Some gift tax planning such as qualified personal residence trusts (QPRTs) and irrevocable life insurance trusts (ILITs), may become less beneficial if the estate tax is permanently repealed. However, charitable planning techniques such as charitable remainder or charitable lead trusts should still be considered for the current income tax benefits that can be realized. In addition, estate planning does not only involve estate tax minimization. Estate tax planning includes estate distribution planning which directs whom should receive your estate, when and how much.
The past 15 to 20 years has seen considerable volatility in estate and gift tax rules, from elimination of the estate tax for one year to only be reinstated with a change in the President and Congress. A total repeal of the federal estate tax in the tax legislation next year could allow for planning to hedge against the possible return of the estate tax in the future. We will continue to monitor and communicate the impact of any proposed legislation on the estate and gift tax laws. Please contact your Withum tax advisor how the possible change in the estate tax impacts your personal family situation.
|Hal R. Terr, CPA, PFS, CFP®, AEP®, Partner
T (609) 520 1188
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.