Another Evolution of Estate Planning- The Trump Administration’s Estate Tax Proposals


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President Trump has followed through with his campaign promise and is proposing a repeal of the federal estate tax along with a repeal of the 3.8% Medicare Tax. Not to mention, a reduction in the income tax rates will also reduce the income taxes paid by trusts.

What does this mean for clients and planners?

For clients, the federal estate tax will make shift from being largely irrelevant to non-existent. The current elevated exemption amounts, which allow a married couple to give away almost $11 million estate tax free, make the federal estate tax largely irrelevant to most Americans. It’s repeal only solidifies this position.

For Planners, our jobs are going to become even more income tax focused. Over the past fifteen years we have seen the federal estate tax move from a $1 million estate tax exemption, to an unlimited exemption and then retreat back to a $5 million exemption adjusted for inflation. In 2010, some in the estate planning world were afraid becoming the equivalent of a typewriter repairman – no one needs typewriters anymore just like no one needs an estate planner if there is no estate tax.

However, the repeal of the estate tax in 2010 and the enactment of the American Taxpayer Relief Act in 2012, created an evolution of estate planning. The new estate planning environment forced planners to become more income tax focused and less estate tax driven. It also increased the need for specific and detailed trust planning to meet these needs.

If the Trump administration’s proposals become law, we will see another evolution in estate planning.

Although the Congressional battle is still roiling, presumably, we can put the Obama administration’s proposals on the shelf. The most troubling of which involved the removal of valuation discounts for closely held business entities, the taxation of grantor trusts as part of a taxable estate, restrictions on GRAT planning, the potential reduction in estate tax exemption and a decoupling of the estate and gift tax.

No estate tax and a repeal of the 3.8% Medicare tax will be a huge boost for trust planning. For 2017, trusts are taxed at the highest income tax rate after they exceed $12,500 in taxable income. Then, the 3.8% Medicare tax is levied against trust income as an additional tax. Under the proposed rules, the income tax rate for trust would be lowered and the 3.8% Medicare tax would be eliminated.
What is the next shoe to fall? POTUS will likely propose making changes to the “step-up” in basis rules as well. In talks on the Campaign trail and following his election, President Trump alluded to limiting the “step-up” in basis rules to $10 million in assets.

In the same way the last round of law changes pushed the estate planning world to be more income tax focused and rely more heavily on detailed trust planning, any changes we see from the Trump administration will push planners further down this road. The rules will be different, but the need for planning will continue.

At the end of the day, the Trump administration’s proposals both benefit the taxpayer and also trust planning. The repeal of the federal estate tax may appear to lessen the need for estate planning, but it creates even more reasons to move assets into trust and out of your taxable estate.


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