It is assumed there is going to be some sort of estate tax reform. Whether the estate is entirely repealed, or a partial repeal, remains to be seen. An initial response may be that, “yippee” we no longer need estate planning. As attractive as that sounds, it is probably naïve. This article is intended to simply raise some of the questions we all have, with no concrete answers at this point.

It’s tough to make predictions, especially about the future.

Yogi Berra

Although tax reform is widely discussed as inevitable with the Trump administration, when it will occur is certainly unknown. With the setbacks we have already seen, such as Obamacare, things are not going to go as smoothly as Republicans might have thought. Thus, it is likely that any serious estate tax reform will not occur until the second half of 2017, if then. Most of the publicity has to do with income tax legislation, although it is a fair assumption that the estate and gift tax repeal or change would be swept in at the same time. Of course, that is not necessarily true. Whichever direction estate tax reform may go, the political reality is that Republicans will eventually lose control, Democrats will regain control and may try to reinstitute or modify any estate tax changes. Some historical perspective here is helpful.

Currently, estate and gift taxes raise less than 1% of the total federal revenue. Therefore, one of the realities of estate and gift tax law is not to raise revenue, but for social purposes. Our present estate tax laws go back to 1916. They were enacted to help fund World War I; however, when that war was over, it is no shock that the estate tax was not repealed. This has been historically true of many tax implementations in our country’s history. Now, it seems generally agreed the purpose of the estate tax is to limit the transfer and built up of huge estates. If that thinking prevails, then the actual amount of money raised or not raised by the estate tax will not be as important as the perceived society benefits to the prevention of wealth accumulation.

As economists discuss the repeal of the estate tax, there are numerous issues, none of which can be anticipated at this point. From a planning standpoint, it is going to be difficult to know which way to plan, until it becomes clearer as to what type of legislation might be passed. For example, there is presently a concept known as Generation Skipping Transfer Tax (GST), which again is designed to prevent the build up of wealth. If this GST tax gets eliminated, with the likely threat that it could be readopted at a later time, there might be some planning opportunities in putting property or assets into dynasty type generation skipping trusts, with the hope that these would be grandfathered in the event of any future legislation. That is totally speculative, but at least provides some planning opportunity.

Planning will also be made difficult by not knowing the effective date of any estate tax elimination. If Congress gets to this matter quickly, they believe that they could make it retroactive to January 1, 2017. But as Congress gets more and more delayed, that appears less likely. Since there would be some loss of revenue from this, the issue will also be whether a change would be effective immediately, or phased in over a number of years. An additional problem Congress will have in passing any such law is not just the normal bipartisan fights, but expect lobbyists to become very vigorous in their support or rejection to any change that impacts their respective industry.

While some people believe that a repeal of the estate tax would necessarily take with it a repeal of the gift tax, that is not so apparent. The proposed legislation eliminating the estate tax does not seem to equally repeal the gift tax. So, we will have to wait to see how gift tax may be treated.

One thing most experts agree on is that if the estate tax is repealed, Congress would also do something about changing the step up in basis rules. Most commentators believe that the step up in basis concept will be eliminated. This would allow a potential recovery of revenue from income tax, because the carryover of the decedent’s basis in some fashion would certainly cause more income tax at a later time. However, as with our present system, usually the taxpayer controls when the capital gains is going to be triggered. Just a simple reduction of step up in basis could have unintended consequences, if people continue to hold on to assets. There are numerous variations of what could replace the step up basis. Thus, keep an eye on that critical part of any discussion.

What is the conclusion of all this? We at CCHA believe that a repeal of the estate tax will not result in a simple approach that would require no planning. Planning may just get more complicated, especially if one considers that you are now going to need to plan estates based on current law, but also needing to keep a close eye on what political reaction could be in the future to reestablishing the law that gets repealed.

If you have not yet had the opportunity to discuss your estate planning needs with an attorney or would like your existing plan reviewed and updated, please contact us to schedule a free consultation.

To learn more about Jack and his practice, please visit his profile.