Nothing - under ordinary times - is certain except death and taxes. But under President Donald Trump - only death is certain.
Yes, taxes, and especially estate taxes - go away. Or at least that's what President-elect Trump has proposed. So, what might you do to prepare for the possibility of estate taxes going away?
In a recent edition of Steve Leimberg's Estate Planning Newsletter, estate planning attorneys Jonathan Blattmachr and Marty Shenkman detailed in about 6,000 words what might happen.
Start first with this: "While no one can determine without a Ouija Board what will happen, these authors believe that the estate tax is doomed," wrote Blattmachr, director of estate planning for Peak Trust Company, and Shenkman, an attorney and co-author of The Tools & Techniques of Estate Planning.
Doomed, yes. But what comes next and when is anyone's guess. Consider, according to Blattmachr and Shenkman, the range of possible tax scenarios given the election results:
Immediately permanent repeal of the gift, estate, and generation-skipping transfer (GST) tax.
Permanent repeal of all transfer taxes to take effect over some phase-out period, for example ten years similar to what occurred in 2001. This would also present the risk that the tax may be changed again during such phase out period as happened in the past, wrote Blattmachr and Shenkman. It is not clear that a President Trump would be satisfied with such a lukewarm version of repeal.
Repeal of the estate tax but retention of the gift tax as a backstop to the income tax.
Repeal of the estate tax (with or without a repeal of the gift tax) and carryover basis.
Repeal of the estate tax (with or without a repeal of the gift tax) and a capital gains tax on death - a capital gains tax on death, for instance. Or maybe a President Trump would treat inheritances as ordinary income.
Another uncertainty is the timing of any estate tax repeal. It might be effective January 1, 2017, or delayed to 2018, or phased in over ten years, or... well, your guess is as good as anyone's.
Bottomline: "While there is much uncertainty, the results of the election seem to suggest a strong likelihood of estate tax repeal, and estate planning as we currently know it may be dramatically changed," the authors wrote.
So how might you go about planning your estate given all this uncertainty? Via email, Shenkman answered the following questions and, in doing so, provided a roadmap for your estate plan:
Q: What should those who have not yet started their estate plan do now?
Shenkman: Estate planning never should have been only about estate taxes, so if anyone doesn't have a plan and documents appropriate for their situation, they should take steps to get them. They should not wait for the resolution of what a Trump administration may enact as that might take quite some time, and will only affect the tax aspects of what they do.
For most people, more wealth is dissipated from elder financial abuse, lawsuits, divorce, spendthrift heirs and other risks then from estate taxes. Properly crafted modern trusts can address all of these goals, and provide more flexibility no matter which way the tax winds blow.
Q: What should those who are in the process of creating their estate plan do now?
Shenkman: If the result of their plan in process is to shift wealth into flexible well-crafted modern trusts, then the planning is likely to be advantageous no matter what happens with the tax law. One way to understand this is that if the entire gift, estate and estate tax system was repealed tomorrow, I would advise most clients to transfer more wealth to these trusts for all the other reasons noted above.
In some limited circumstances, some clients are modifying their plans in process but hitting the "pause" button can be dangerous for those of means because of the incredible uncertainty: when will the law be changed if at all? What will the new laws look like? Will a repeal be phased in? What will the administration elected in 2020 do? Will the next administration reinstate the estate tax? And of course, the biggest "what if" for most estate plans, when will you die?
Q: What should those who have estate plans in place do now?
Shenkman: If they are ill or on in years, they should consider updating their powers of attorney and revocable trust to add flexibility for future gifts transfers or exercise of powers in existing documents in case their capacity wanes, and then when the new law becomes clear, they may not have the ability to effectuate change in their plans. For example, most powers of attorney provide that gifts can be made to the annual exclusion plus tuition and medical.
For many powers of attorney that I draft, I have given the agent the right to make gifts up to the federal estate tax exemption so long as made to existing irrevocable trusts the client created. That way, the gifts can only be made in conformity with the client's wishes since the client created the trust. It might be advantageous, perhaps with that same restriction, to permit unlimited gifts if the client is comfortable, since it will provide more flexibility to deal with the unknowns. It might be advantageous to give someone the authority to eliminate the client/settlor's rights in a revocable trust thereby making the gift irrevocable.
Q: What do people need to know about reviewing existing wills and revocable trusts?
Shenkman: They need to review them once there is a better idea of what the new laws will provide to assure that they will still accomplish their goals. Certainly, it might be worthwhile amended documents to add more flexibility since no one contemplated a Canadian-type system etc. However, it is unlikely that many (any?) clients will be willing to do this with so much unknown as they will likely have to revise it when the law changes and becomes known.
Q: What if there is a capital gains tax at death? What can be done now in anticipation that it may happen?
Shenkman: Taxpayers should not dismantle planning or cancel life insurance until all the details of a plan are known. For those that purchased life insurance to pay an estate tax, it might be able to be redeployed in the same trust to pay the capital gains tax on death. It is possible that assets shifted to an irrevocable trust now (before the new law is enacted) might avoid the capital gains tax on death. That is one reason those with valuable real estate and family business holdings should continue to plan now.
Q: What if there is a carryover basis from the decedent at death? What can be done now in anticipation that it may happen?
Shenkman: If there is a carryover basis taxpayers will have to endeavor to keep better records. Then post-death, if assets are sold, income tax planning to minimize that gain will become de rigueur to harvest gains and losses, use tax deferred 1031 exchanges for real estate, etc. My gut feel, however, for whatever that is worth, that a capital gains on death is more likely as the revenue projections will look more valuable especially on a present value basis, to offset the loss of estate tax repeal.
Q: What should those who purchased life insurance to fund estate taxes do?
Shenkman: Not cancel it until they evaluated it. There are often (not always) other uses and purposes for life insurance. Also, the average individual investor has earned only about 2.1% on their investments per year over the last 20 years. For many people the insurance policy may out perform their investments. Also, many cash value policies are in irrevocable trusts, safe from creditors, divorce and perhaps whatever new tax system is enacted. So, it is far more prudent to have an intelligent assessment of options before taking any action.
Q: Do people need to worry about/plan for state estate and inheritance taxes?
Shenkman: Maybe. Many state estate taxes will likely disappear if the federal estate tax is repealed. State inheritance taxes would not automatically disappear but it might be harder for states to retain transfer tax systems if the federal system is eliminated (but we are not sure that will happen yet).
Q: Will it still be worth doing trust planning and, if so, why?
Shenkman: Yes, for the reasons above: trusts protect assets from elder financial abuse, divorce, malpractice and more. Non-grantor trusts can permit the sprinkling of income among a class of beneficiaries (e.g., all descendants) to shift income to lowest bracket taxpayers. Q: What are some 2016 year-end planning considerations?
Shenkman: Accelerate deductions, defer income, fund 529 plans, make annual gifts to irrevocable trusts, accelerate charitable donations and other deductions.
Q: Any portability considerations?
Shenkman: For anyone that died, extend the estate tax return to delay as long as possible the filing so that perhaps more information will be known to know what to do.