Estate Tax Planning in Uncertain Times– Posted by Alison J. Warden
Repeal of the federal estate tax has been a cornerstone of President Trump’s tax reform promises. Given the Republicans’ majority sweep in both houses of Congress this past November, repeal efforts that have stalled in the past are now a viable possibility. Although repeal is likely to be on the table legislatively at some point during Trump’s presidency, we do not know when the legislation will be proposed, what the repeal would include (i.e., would the federal gift and generation-skipping transfer taxes remain in place?) and what tax structure, if any, would replace the current federal estate tax. What does all of this mean for you? With the fate of the current federal estate tax uncertain, the following considerations and planning tips are worth thinking about in 2017:
A repeal would significantly impact those subject to the federal estate tax. Under current law, the federal government imposes a tax of 40% on estates larger than $5.49 million per person, or $10.98 million per married couple. Given such high exemption amounts, only a small percentage of estates are affected by the federal estate tax. But for those families and individuals that are affected, a repeal could yield significant change. Trump has proposed to cut the federal estate tax to $0 and replace it with a 20% capital gains tax applicable to estates above $10 million (with an exemption for family farms and small businesses). If this were to become law, clients who have planned around the estate tax with credit shelter/bypass trusts and trusts designed to optimize the marital deduction (“QTIP” trusts) will need a thorough review and possibly overhaul of their estate and gifting plan to take into account the realities of an entirely new tax regime. As with before, however, a subsequent change in the administration may result in another change to the estate and gift tax laws, so no reactive modifications to an estate plan should be made without careful consideration of any further potential changes to applicable law.
State estate taxes still matter. Despite the talk of federal repeal, the Washington state estate tax is not expected to be repealed anytime soon, especially since Washington has no income tax and collected over $154 Million in estate taxes in 2015. Washington imposes an estate tax (not inheritance, gift, or generation-skipping transfer tax), but unlike the high federal exemption amount, the state exemption is only $2.129 million. Due to this lower exemption amount, Washington’s estate tax often impacts middle class individuals and families, especially those that have life insurance policies, substantial retirement savings, significant value in personal residence, rental real estate, or a family farm that push a decedent’s gross estate over this threshold. Estates greater than $2.129 million face a 10-20% tax rate on amounts above the exemption amount. Therefore, despite the prospects of a federal estate tax repeal, estate tax planning on the state level is still important for Washington residents. Planning with credit shelter and bypass trusts are still viable strategies – and will likely remain so whether or not the federal estate tax is repealed.
Even with a Republican-controlled legislature, a repeal is not certain. Although there is majority support in Congress for a repeal, the legislative process (particularly in the Senate) could still prove to be an obstacle for proponents of the repeal. A super-majority of sixty (60) Senate votes is necessary to overcome a filibuster, although a repeal could still pass the Senate with a simple majority as “budget reconciliation” legislation. If passed as a budget reconciliation action, the repeal would be required to “sunset” (i.e., expire) in 10 years – which in turn would create more uncertainty about the future of the tax and make necessary the burdensome task of planning for multiple tax scenarios. Further, even if the federal estate tax is repealed, it may be replaced with a capital gains tax (Trump’s campaign proposal) or carry-over basis regime, and the federal gift tax and generation-skipping transfer tax might be used as bargaining chips resulting in their continued existence. As mentioned previously, any repeal of the federal estate tax could itself later be repealed and the federal estate tax could change again, with a new administration and/or change in Congressional control.
2017 Planning Tips
Given all of these uncertainties, planning around the estate tax continues to be challenging, but here are a few general planning tips:
(1) For high-net-worth individuals and families, review and flexibility is key. Ask an experienced tax and estate planning attorney to review your current plan in light of the potential for change. Current estate plans should account for the possibility of a full repeal while also taking into account the reality that the federal estate tax, in some form, may be here to stay.
(2) Washington residents with gross estates greater than $2 million should not assume that estate tax is a non-issue and should work with their legal counsel to design a plan that maximizes the use of their state exemptions. Because Washington does not impose a gift tax, gifting strategies to minimize exposure to the Washington estate tax should still be considered in certain circumstances.
(3) High-net-worth individuals contemplating extremely large gifts or irrevocable trusts designed to avoid the federal estate tax would be well advised to work closely with tax-knowledgeable estate planning counsel to ensure that their gifting strategy is still sound and achieves the desired objectives. A “wait and see” approach for these transactions may – or may not – be warranted.
If you would like advice about how the federal estate tax or the potential for its repeal might affect your situation, or if you believe that your estate plan might be impacted by the Washington state estate tax and would like to know more about how to minimize exposure, please feel free to contact me or one of our other estate planning counsel at Lasher Holzapfel Sperry & Ebberson to set up an initial consultation.