We have to play the hand we’re dealt, even with estate taxes. Trump’s proposals have mere outlines for the public, but he’s promised a major shift in the federal estate tax.
The Trump Plan
At its core, his plan will theoretically eliminate all estate, gift and generation-skipping transfer (GST) taxes.
Sounds great, right? Don’t get too excited just yet.
First, the current law dictates that the 2017 federal estate tax exemption will be $5.49 million. Assets above the exemption are subject to a federal tax rate that tops off at 40%, and then there are additional tax rates imposed by some states.
At best, Trump’s proposals couldn’t take effect until 2018. He’ll need that time because new tax policies and amendments need the backing of Congress and must be initiated by the House of Representatives. House Speaker Paul Ryan has his work cut out for him.
Estate Tax Eliminations
The proposal to eliminate estate tax would also void portability. Introduced by the Obama administration, portability takes the unused federal estate tax exemption of a deceased spouse and adds it to the available exemption of the surviving spouse. This often depends on the election made on the deceased spouse’s estate tax return.
Additionally, the current annual $14,000 gift exclusion would be voided. Gifts can be disseminated to as many people you’d like and can take the form of a car, property, check, or other tangible asset. These gifts are free to recipients and do not have to reported by the giver up to $14K, and the proposal does away with the idea of taxation altogether.
I’m highly skeptical that all this would pass through Congress as listed above. Cutting all these taxes and expenses are great in theory, but they need to be balanced by new revenue sources.
Then of course there’s the matter of inheritance. Today, if you die and leave assets to your beneficiaries, it gets stepped up to fair market value. The president-elect is proposing an elimination of that concept, which is a problem since capital gains can be taxed at death without it.
Further details are sparse. On Trump’s web site, his tax plan regarding death tax is as follows:
The Trump Plan will repeal the death tax, but capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.
That’s where that conversation ends, and there’s no mention of how the capital gains tax will impact the basis of beneficiaries who inherit assets with unrecognized gain.
A Pragmatic Look Ahead
It’s no surprise that Trump would want to eliminate all estate taxes, since this would have a major impact on him and his family. As a wealthy business owner, the personal enrichment of his family is what he thinks about. Just because a president proposes tax cuts doesn’t necessarily mean it’s going to happen. Like the rest of his ideas they remain just that — ideas — shrouded in secrecy for at least the next seven weeks.
Professionally, I believe these proposals were written in crayon by a kleptocrat. If there’s a chance that these will be passed into laws in some form, then we have to work with them.
Brinen & Associates has deep experience in handling estate taxes for business owners and individual clients. Feel free to contact us with any questions.