Just when it seemed as though the federal estate and gift tax laws were pretty much settled, enter Donald Trump as President and a Republican majority in both houses of Congress. Mr. Trump’s election brings about the potential for significant changes in federal estate and gift taxes.
Currently, there is a $5,490,000 per person federal estate and gift tax exemption (increased from $5,450,000 in 2016) and a 40% top tax rate. This means that only estates over the exemption amount ($10,980,000 for married couples) will pay an estate tax. However, all estate assets receive a “stepped up cost basis”. Meaning appreciated estate assets would have any built in capital gain wiped out.
The Republican hard line position which passed the House on a 240-179 vote in 2015 was a complete repeal the estate tax coupled with continued stepped-up cost basis. However, that was doomed to never pass in the Senate. By contrast, Hillary Clinton’s plan was to toughen the estate tax by dropping the exemption level back to $3.5 million per person, and putting in new rates ranging from 45% up to 65% for mega-estates while keeping the stepped-up cost basis. Then there’s the Trump plan which seems like a compromise between the two: The Trump Plan would repeal the death tax, but capital gains on assets held until death in estates valued over $10 million will be subject to tax in order to exempt small businesses and family farms. This would mean no stepped-up cost basis for appreciated estate assets. The Trump plan, seemingly to prevent abuse, would also provide that contributions of appreciated assets into a private charity established by the decedent or directly to the decedent’s relatives would be disallowed. Whether those capital gain taxes would be due upon the death of the decedent or at the time the beneficiaries sell the appreciated assets is unclear. Also unclear is whether the disallowed transfers of appreciated assets to the decedent’s relatives would have a look back period. One would assume there would be a look back period, but for how many years… 3, 5 ?
This uncertainty suggests that an estate plan for large estates (those over 10 million) should still include aggressive gifting of appreciated assets to the next generation in order to get the value of decedent’s estate below 10 million far in advance of the look back provisions. Although I am sure we will be hearing a lot more about changes to the estate planning world, and in short order, it is as important as ever to get your estate planning in order as soon as you can.