As this time, it is difficult to determine what the specific provisions of President-Elect Donald J. Trump’s tax proposals will be; however, it is important to highlight the types of planning that are not likely to be affected, and therefore could, and should, continue.
First, in 2016, federal estate and gift taxes became an issue for estates (including life insurance that isn’t in a Crummey trust) over $5.45 million per individual or $10.9 million per couple. For those under those amounts, there isn’t a need to worry about federal estate and gift taxes (except insofar as gift tax reporting may be needed for those gifts over $14,000 to an individual).
Second, basic planning for Wills, Trusts, Medical Directives, and Powers of Attorney still need to be done, since the probate process after death isn’t going away. There will still need to be planning for minor children, businesses, out of state property ownership, etc. Planning will still need to be done for beneficiary designations, retirement plans, and specialized trusts because IRAs/401Ks will continue to be needed for non-spouse beneficiary asset protection purposes, as well as to protect the interest of minors.
Third, there will still be a need for protecting assets, income tax planning, and proper reporting (especially for foreign assets). Therefore, a significant amount of planning will not change regardless of the administration.
Estate Taxes & President-Elect Trump
According to the donaldjtrump.com website (as of 11/15/16), his policy as to the “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.” So, for the vast majority of estates, those below $10 million, there will still be the same step up in basis as before.
As an explanation, step up in basis currently works as follows. Let’s say the decedent had bought a rental home for $10 and it is now worth $100 at the time of decedent’s death. If the decedent sold it during the decedent’s life, there would have been $90 subject to the capital gains tax. Under current law, at death the basis would be stepped up for the beneficiaries or heirs of the decedent’s estate, so that if they sold it for $100, there would be no capital gains tax. Note that this capital gains tax is separate from the estate tax discussed above, and so the purpose of the step up is to prevent double taxation (i.e., both estate and capital gains tax). Trump’s plan lists a maximum capital gains tax rate of 20%.
As shown above, under Trump’s plan, for estates over $10 million, there would be no step up in basis for those amounts over $10 million. To use our example above, if the rental property were part of capital gains in excess of $10 million, then there would still be the $90 subject to capital gains tax at death. However, they would not have to pay the estate tax, which is currently at 40% for those amounts over the exclusion amount.
There is also the anti-abuse provision set forth in Trump’s plan, regarding prohibitions on transfers of appreciated assets to closely held family charities. As such, any plans involving such gifts will have to be closely analyzed as we receive more information regarding the plan.
Trump’s plan will likely mean that there will be strong incentives to keep taxable estates within the family, via trusts, to postpone the capital gains tax as long as possible. Therefore, the rule against perpetuities will be very important to consider, and states that have abolished the rule (or have a very long time period) will have many wealthy people taking advantage of their trust laws. The rule against perpetuities is the most dreaded question on a law school exam, so we won’t go into it here. Suffice to say for our purposes the rule against perpetuities is a limitation on the time period that an interest in a trust can vest. However, it is possible that the actual estate tax repeal proposal will contain restrictions against dynastic trusts. It is also unknown as to whether or not the gift tax will also be repealed.
In conclusion, the vast majority of estates will be under $10 million, and will therefore see little change. However, proper planning will still be important for beneficiary designations, probate, protecting assets, minor children, out of state property, and retirement benefits.