President-elect Trump and House Republicans have issued proposals to end the estate tax, indicating that a repeal is very possible. But what are the potential ramifications should this occur?
For 2017, the combined federal estate- and gift-tax exemption is $5.49 million per individual ($10.98 million per married couple). If the current estate tax is repealed, it will provide a tax cut to high net worth individuals. The fate of the gift tax, which applies to transfers during life, is also uncertain. In addition, under current law, there is an income-tax provision known as the step-up in basis which allows assets held at death to bypass capital-gains tax. At the moment, the Trump proposals would eliminate the step-up in basis above an exemption of up to about $10 million. If this scenario holds, either the deceased person’s income tax cost in the assets would transfer to the heirs, or a capital gains tax would be imposed on the difference between the fair market value at the date of death and the decedent’s tax basis.
Even in this uncertain environment, there are still some planning steps to consider.
Sign Your Will Now: Estate tax or not, it is important to have a valid will. To factor in potential changes in the law, you might consider building flexibility into your will.
Stay Away From Taxable Gifts: Avoid making irrevocable moves that risk a bill for gift taxes, unless there is an important reason, such as transferring shares in a company going public.
Keep Making Annual Tax-free Gifts: You can make nontaxable gifts of up to $14,000 per recipient a year. One partner of a married couple can transfer up to $28,000 per recipient if the spouse consents and gift-tax returns are filed.
Be Careful with Valuation Discounts: In 2016, the Treasury Department and IRS proposed regulations that would significantly limit the ability to use valuation discounts in the context of transferring interests in family-owned entities to family members. The proposals faced opposition by tax practitioners, taxpayers, and other advisors and now seem unlikely to survive in their current form.
Factor in Timing: Historically, some estate-tax changes have been retroactive and others haven't, so it is hard to predict what Trump and the Congress will accomplish. It is also uncertain whether any changes will be permanent or will include expiration dates.
As always, all decisions should be made with the advice of a financial advisor who is aware of your full financial picture and your personal circumstances.
If you have questions, contact me at SDitman@BerdonLLP.com or your Berdon advisor to discuss your personal circumstances
Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.