How your estate planning practice can best serve clients in light of new estate and tax legislation
Estate planning legislation is in a holding pattern until the administration's plans become more clear. However, it’s safe to assume that change is coming, and attorneys should prepare their estate planning practice by advising clients on the proposed estate tax legislation.
President Trump and his administration have pledged to scrap the current federal estate tax altogether, with the gift tax likely to remain in place. In light of imminent change, here are some key topics estate planning attorneys should keep on their radar.
Effect on Gift, Estate, and Generation-Skipping Transfer Taxes
Estate tax repeal has long been a Republican priority, and chances of success are greater now than ever. In reality, total repeal of the estate tax is uncertain. Both the White House and Congress are in conceptual agreement that the estate tax should be repealed. However, the Senate’s 60-vote requirement is an impediment to the majority needed for passing tax legislation. It remains to be seen whether a bipartisan solution will emerge.
In the meantime, it’s important for estate planning attorneys to remember that repeal of estate tax affects only .2% of the population at the current exemption levels ($5.49 million per individual and $10.98 million for married couples in 2017). The most significant impact will come from any changes to income and business taxes.
Effect on Individual Income Taxes
President Trump promised to simplify the Internal Revenue Code and provide tax relief for middle class Americans. While his plan differs in some respects from the House Republicans’ Tax Reform Task Force Blueprint, the two plans are in fundamental agreement on major issues. Both plans would simplify tax brackets, lower tax rates, and eliminate the alternative minimum tax, estate tax, and 3.8 percent net investment income tax.
President Trump’s proposed plan would accomplish the following:
- Reduce the current seven tax brackets to three brackets with tax rates of 12 percent, 25 percent, and 33 percent
- Eliminate personal exemptions and increase the standard deduction to $30,000 for joint filers and $15,000 for single filers
- Cap itemized deductions at $200,000 for married/joint filers or $100,000 for single filers
- Eliminate the 3.8 percent Obamacare tax on net investment income
- Cap the capital gains tax rates at 20 percent with a lower rate for individuals who are not in top brackets
- Tax carried interest as ordinary income
- Eliminate “special interest tax breaks” and cap deductions at $100,000 for single filers and $200,000 for married filers
- Eliminate the alternative minimum tax for individuals and businesses
- Create new dependent-care savings accounts to be used for child and elder-care.
This ideological agreement between the White House and Congress should facilitate tax reform in 2017 and increase the potential for lower income taxes in 2017. Given this, estate planning attorneys should consider recommending that clients defer any income (including capital gains harvesting) until next year. Deferring income and capital gains gives clients the ability to benefit from any future reduction in taxes. Since it is almost certain that taxes will not increase in 2017, there is little downside to this wait-and-see approach.
Effect on Family Owned Businesses
Upcoming tax legislation could also change the advice that attorneys give regarding transfers of family-owned business interests. Until the election, the Proposed 2704 Regulations that would eliminate most valuation discounts for family-owned businesses were viewed as a threat to taxable estates. Conservative planners, therefore, advised clients to take action immediately before the Proposed 2704 Regulations were finalized.
Given the possibility of estate tax repeal and lower capital gains rates rushed planning is unnecessary. Instead, the best approach may be to defer action until next year unless clients would otherwise transfer ownership and need the relative certainty of the current law. Should the estate tax be repealed, attorneys will have the opportunity to revisit family limited partnerships and family limited liability companies to remove any tax-motivated restrictions that do not align with current business objectives.
Prepare your estate planning practice with these top short-term strategies:
- Keep your clients updated with newsletters, emails, and blog posts
- Advise clients to defer any income until next year
- Prepare clients to revisit old wills and trusts in the event of repeal
- Maintain smart estate planning strategies like preparing for incapacity
- Consider investing in estate tax software, which will update automatically, to easily stay current on legislative changes.
Download What a Donald Trump Presidency Means for Estate Planning to learn more about the pending changes under the new administration and how to prepare your clients.