With proposals to repeal the federal estate tax and the generation-skipping transfer (GST) tax on the table, the new administration may be opening up some rare estate planning options.
Under President Donald Trump’s proposal, the current step-up in basis for income tax purposes on assets owned at death would be limited to $10 million of assets. The intention, according to the proposal, is to exempt small businesses and family farms.
It’s likely that assets exceeding $10 million in value would be either subject to carryover basis rules of some kind or would be subject to capital gains tax at death. Under Trump’s proposal, the current capital gains tax rate of 20 percent would be retained.
Whether the gift tax would be repealed remains unclear.
It’s important to remember that for the estate tax and other transfer taxes, the devil is in the details, and many elements remain unknown. Speak to your estate planning lawyer to determine how any changes might affect your planning and to review your estate plan as a whole.
Potential planning tools
Here is a look at some planning tools that would be in play if the estate tax was repealed:
- Dynasty trusts: If the federal estate, gift and GST taxes are repealed for any length of time, taxpayers could create generation-skipping trusts known as dynasty trusts that could possibly last into perpetuity.
Such trusts could be created to support future generations, allow for asset protection and avoid death taxes entirely. Dynasty trusts could also be created at death if the gift tax stays intact, but the estate and GST taxes are repealed.
- Income tax planning: If the federal estate, gift and GST taxes are repealed, income tax planning may become more prominent. Especially if the gift tax is repealed, there may be a significant focus on ways to shift assets among family members in order to avoid or minimize the payment of capital gains taxes.
- Charitable giving: The effect of the Trump proposal on charitable giving at death remains unclear. It seems logical that the elimination of the estate tax (and thus the deductions associated with charitable giving) will trigger a significant decline in charitable giving at death. Also, one controversial element of the Trump plan states: “To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.” This statement requires clarification, and might well never become law. But it does indicate an attempt to deter donations of appreciated assets to private foundations, which is allowed under current law.
How likely is repeal?
Keep in mind that we have been down this road before. So how likely is repeal this time? The answer is that it depends.
A so-called “permanent” repeal of the estate tax requires 60 votes in the Senate to avoid a probable filibuster. However, a 10-year repeal of the estate, gift and/or GST taxes could move forward through the budget reconciliation process, which doesn’t involve the usual procedures and would only require a majority vote. Regardless of what happens during Trump’s term, keep in mind that a new Congress could always reverse any change that might be made.