By John O’Grady, O’Grady Law Group
The federal estate tax is a tax on the date of death value of a person’s assets in excess of about $5.5 million. It is designed to redistribute wealth. Donald Trump promised significant tax reduction and repeal of the federal estate tax throughout his campaign. While predicting political consequences can be hazardous, estate attorneys and their clients should consider the very real possibility that the federal estate tax will be repealed in 2017. My personal predictions:
• There will be significant tax reform within 100 days after the new President’s inauguration.
• This tax reform will be retroactive to January 1, 2017.
• The estate tax will be repealed. It is uncertain whether the gift tax will also be repealed.
• The recent IRS proposal to limit or eliminate discounts for certain transfers of interests in family enterprises will be rescinded.
• The estate tax may be replaced by an income tax. This income tax would carry-over basis from an estate to heirs, unlike the “step-up in basis” under present law. This will ultimately cost the beneficiaries a lot of tax dollars when the property is sold.
In most situations, I suggest:
• Unlike prior years, most planning for year-end transfers should be deferred until 2017. While there is no absolute assurance that the estate tax will be eliminated, the probabilities suggest that a “wait and see” approach will be best.
• Waiting, however, should not apply to transfers that have significant non-tax motivations.
• Waiting also should not apply to “regular” transfers such as annual gifts to children, if one is willing to make them. No one should be worse off by proceeding here.
• Waiting also should not apply to income tax motivated transfers.
• If a person was planning to utilize “unified credit” to make gifts this year, that could still be done. However, there should be a non-tax purpose rather than purely using up unified credit. Unless the asset is expected to appreciate significantly before early next year, the opportunity still will be there to make the gifts if the estate tax is not repealed.
If the estate tax is eliminated, married individuals and certain others will need to revise their estate plans. Currently, many estate plans have formula allocations based on the current tax rules. These estate plans then could be simplified and would need to have tax formulae eliminated. Similarly, certain other planning structures implemented with estate taxes in mind could be dismantled.
At the same time, if there has been “tax channeling” toward particular dispositive approaches, individuals may wish to consider new ways of managing assets for future generations. An elimination of the estate tax does not eliminate estate planning, but only changes certain of the technical considerations underlying estate planning as we know it today. Any new income tax rules designed to replace the estate tax will inevitably present new planning opportunities.
John O’Grady leads a full service estate and trust law firm in San Francisco. He served as the 2012 Chair of BASF’s Estate Planning, Trust & Probate Section. His practice includes Estate Planning & Administration, Probate & Trust Litigation, Collaborative Practice, Mediation, Conflict Coaching, Elder Law & Taxation.