Every time there is a significant shift in power in Washington it brings with it the prospect of changes to the tax code. This election cycle is no different. There has not been a major reform of the tax code since 1986. President-elect Donald Trump has indicated that tax reform is one of his top priorities. With Republicans controlling both the House and the Senate as well as the White House, the prospect of a major reform of the tax code has increased. Reforms to both the individual tax laws and the business tax laws are likely.
President-elect Trump's plan for individual tax reform is significant and sweeping and includes reducing the number of individual tax rates to three (12%, 25%, and 33%), repealing the alternative minimum tax and repealing the estate tax. It is important to remember that while this is Trump's plan, it still may face opposition from Senate Democrats, concerns from law makers of lost revenue as well as potential opposition due to the loss of popular tax breaks and deductions. However, there is significant chance that at least some of Trump's tax plan will be implemented, including the possibility of the repeal of the estate tax.
What does this mean for estate and gift tax planning today?
1) Do Not Dismantle Tax Planning Yet. While the prospect of change is in the air, nothing is certain at this time. The new regime does not come to power until January and even then it will take time before any legislation can be finalized, passed and put into effect. The 1986 tax reform took two years. Because of the uncertainty about exactly what shape tax reform will take, it is our suggestion that it may be best to wait and not necessarily dismantle tax planning that has been incorporated into your estate plan at this time. Additionally, even after reforms are passed it is important to remember that changes to the tax code are never permanent and that future power shifts in Washington could undo the changes we are discussing today. If a repeal of the estate tax does come, then at that time careful consideration should be given to each plan to determine if steps should be taken and changes made, including the possibility of dismantling irrevocable trusts or family partnerships and LLCs designed primarily for estate and gift tax planning purposes.
2) Consider Waiting on Tax Motivated Gifts. There are many reasons people make gifts. Often these reasons have nothing to do with tax planning. However, at the same time, some gifts are motivated primarily for estate tax planning purposes, in an attempt to reduce the potential estate tax burden. It is these tax motivated gifts that you may want to consider holding off on until the tax reforms take shape. It is possible that these tax motivations will no longer exist under the new tax regime.
3) Do Review Your Estate Plans. Many plans that incorporate estate tax planning base a division of assets at death on the current estate tax exemption amount. These plans typically pass an amount that can be given free of estate tax to a family trust, often with an individual's children as beneficiaries. The amount in excess of the estate tax exemption is given to a spouse and/or to charity (as these qualify for a deduction from the estate tax). If the estate tax is repealed, some of these plans will produce outcomes that are not intended, such as nothing passing directly to a spouse or charity. While in many plans, the spouse is also a beneficiary of the family trust, this is not always the case. These plans should be evaluated to determine if the result you intend would still be achieved if the estate tax is repealed. If the results are not what you intend, then revisions can be made to hardwire the division of assets (either based on a dollar amount or percentage of the estate) so that the family gift, spousal gift and/or charitable gift get funded at the levels that you intend.
We are closely watching for changes that are on the horizon and will continue to monitor the situation. If you have questions about how the provisions in your plan may be effected by these potential changes, feel free to contact the office and schedule a time to meet with Christine or me.