President-elect Donald Trump’s tax reform plan includes the elimination of federal transfer taxes. Although this move has been backed by many congressional Republicans, and some Democrats, as well as many in the general public, estate planners and tax advisors are preparing for the possible impact the proposed reform will have on estate planning.
Estate planners are preparing for the possible consequences, even though there are still unanswered questions. For example, if the Trump plan is enacted, what happens to stepped up basis at death? Generally, as a trade-off to the estate or death tax, the heirs receive a step up in the basis of inherited appreciated property equal to the date of death fair market value. Such a step up has been a valuable benefit to middle class taxpayers who don’t pay estate tax, but inherit property. With a step up in basis, the inherited property can usually be sold without any capital gains tax.
Will the gift tax be repealed and will we see the return of carryover basis? Will the capital gains tax apply to all unrealized gains at death? This is a plan adopted in Canada where there is no estate tax, but a tax at capital gains rates on the appreciation between the time the decedent acquired the property and the date of death. What happens to formula funding clauses in existing instruments which were set up to maximize the amount of gifts on death before reaching the estate tax level? How will spousal trusts be drafted when there is no longer a need to meet requirements for a marital deduction? Also, will the same rules dealing with capital gains and stepped up basis that apply to large estates, also apply to smaller estates? What will happen to QDOTS which are used to avoid the estate tax when a non-citizen inherits property? There are many more questions, but these are just a few.
Until we know what type of reform will actually be enacted, these are questions that estate planners and their clients are preparing for in 2017. Generally, the estate planning attorneys at Schneiders & Associates, L.L.P. are advising clients to wait and see a bit before undertaking irreversible estate tax saving techniques. If you have questions about the possible impact of the Trump plan, please feel free to make an appointment with the estate planning attorneys at Schneiders & Associates, L.L.P.