On November 8, 2016, the estate-planning world was turned upside down. The election of a new President and the current majority in Congress creates tremendous potential for change in 2017.
Possible changes may affect estate tax, individual income tax, taxation of capital gains, business taxation, continued viability of the stretch IRA and even elder law—to name just a few issues on the table. The enormity and seeming uncertainty of the potential changes leaves many advisers suggesting that we wait and see what happens next year before planning for your estate. This is in part based on the notion that your plan should be designed to work under the laws in effect when the plan is drafted. However, your estate plan is actually tested based on the laws in effect when you die and not when it was drafted—a very different concept.
If the estate tax is repealed now, will it return in eight or perhaps even four years with a new administration? Will the gift tax be repealed? When would a repeal take place or be effective? The only certainty is the potential for change.
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Waiting to implement or update an estate plan may result in a death or incapacity without any estate plan or with a plan that is inconsistent with your hopes, desires, dreams and goals for your family.
A better move: Draft an estate plan now that provides distribution and administrative alternatives addressing both how the plan should be administered given current tax laws and also if certain changes are in place when you die.
Here are a few of the most dramatic changes that could occur and that you need to consider incorporating into your current plan:
Estate Tax Repeal
The President-elect and other Republicans are pushing for this change. Any repeal of the Federal estate tax would almost certainly be tied to significant changes in the way capital gains would be taxed. While the repeal of the estate tax is very popular and an emotionally charged issue for many, less than 0.2% of the U.S. population pays estate tax. Approximately 5,000 estate tax returns were filed nationally in 2015. On the other hand, we all pay income tax, so the potential change to capital gains taxation is likely to have a wider ranging effect.
Gift Tax Repeal
This repeal is possible but less likely because the gift tax is also a backstop to ensure payment of income tax. Without a gift tax, taxpayers may more easily shift income to family members or others with lower income tax rates. For example, a parent might gift an asset to a child. The child then sells the asset at a lower rate, and then gifts the sale proceeds back to the parent.
Capital Gains Changes
Capital assets traditionally receive a step-up in income tax basis at death. As a result, a sale of that asset upon a parent's death results in no capital gains tax. Without the estate tax system, the parent's original cost or other basis would be used to determine the capital gain subject to tax.
An alternative being considered by Trump's administration would be a deemed transfer at death triggering a capital gains tax even if the property is not sold. This could be exceedingly problematic for maintaining family farms, real property and even family wealth because the cash needed to pay the tax would not be available.
The potential repeal of the estate tax system opens many opportunities to better plan for a family's fears, dreams, hopes and aspirations. In particular, asset protection may be more easily attained without the need to also satisfy estate tax requirements. For example, there may no longer be a need to currently distribute income to a surviving spouse to qualify for the marital deduction for estate tax purposes. Distribution income may subject that income to creditor claims and other liabilities. Current distribution may not be needed or appropriate without this estate tax requirement.
As I review all of this I wonder, is it a blessing or curse to be living in interesting times? I hope that this information is helpful in making a positive difference in your life and for your family. Helping a client and his or her family achieve their enlightened dreams has always been the true goal of a well-drafted estate plan.
John M. Goralka is the founder of The Goralka Law Firm, an estate planning, trust administration, business and tax firm.
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