Many people awoke surprised on November 9, the morning after election day, and few were so ill prepared for the result as estate planners.
We were anticipating the continuation of the existing system highlighted by a $5.45 million exemption for each person from estate and gift taxes, almost $11 million for a married couple, to be adjusted upward each year for inflation. The alternative put forth by Hillary Clinton was a reduction in the exemption to $3.5 million with no inflation adjustments, but a Republican House was unlikely to enact this.
What we got instead was the election of Donald J. Trump and a Congress with both houses controlled by Republicans. Mr. Trump’s platform calls for the outright repeal of the “death tax.” Whether this would also entail a repeal of the gift tax is not known – some feel that “repeal” means repeal of all transfer taxes; others envision the retention of the gift tax as a back-up to the income tax (otherwise a family patriarch or matriarch might make extensive gifts to family members of income producing property, spreading out the income tax burden among a number of lower bracket taxpayers). Of course, repeal of the estate tax would accompany a proposed $1 trillion infrastructure spending proposal, and the Senate still has special rules regarding filibusters, budget reconciliation measures, and the “Robert Byrd rule” which could quash repeal, defer it, or allow it to reappear in a “sunset” after ten years. However, abolition of the estate tax would, in fact, be little mourned. It has become incredibly complex and despised even by persons with no prospect of facing its imposition. It raises far less than 1% of federal revenues and rising statistics on income inequality demonstrate its apparent ineffectiveness in preventing wealth concentration.
There is a sense that any advice concerning the changing landscape would be applicable only to very wealthy people who traditionally use sophisticated planning techniques to avoid or mitigate significant gift and estate tax exposure. Nevertheless, the importance of planning and assessing possible future changes includes people of more moderate wealth as well.
If your existing will or revocable trust was in any way tailored for tax planning (remember that only a decade ago the exemption was at $600,000), it is ripe for review. Many will and trust distribution provisions are based on tax formulas. Depending on the wording used (and it is alarming how slight nuances can make a big difference), possible future tax changes might undermine an entire estate plan. For example, if your will provides that the maximum amount that can be bequeathed without triggering a federal or state estate tax will pass to a credit shelter trust (typically a family trust that benefits the surviving spouse and descendants) what happens if federal estate taxes are eliminated? (Note that, in Virginia, there is no state estate tax, so that is not a consideration). Does the maximum amount that will not trigger tax mean your entire estate? Or perhaps, depending on the wording of the instrument, no assets pass to the credit shelter trust, and the entire estate may pass to a marital trust. In some cases it may not matter, as in the common case where both trusts had the surviving spouse as the sole beneficiary anyway. But if the credit shelter trust benefits, say, children from a prior marriage and the marital share benefits a new husband or wife, the difference could be crucial.
If the gift and estate taxes (and generations skipping tax as well) were repealed, does that mean you should do nothing? On the contrary, consideration should then be given to shifting wealth into irrevocable (but flexible – “irrevocable” is never so irrevocable as it seems) trusts in trust friendly jurisdictions, such as Alaska and Nevada. Even with tax considerations out of the way, such trusts provide significant protection from lawsuits, other claims, divorce awards, elder financial abuse and more. Transfer taxes have served as a major barrier to this type of planning. In an environment free from transfer taxes, if assets are transferred to trusts in trust-friendly jurisdictions, they can be insulated from the claims of creditors and predators, in some cases even if the person creating the trust is a potential beneficiary.
It is unlikely that tax planning will be eliminated altogether. One of the possible supports for Trump’s transfer tax repeal landscape is the possibility that capital gains tax will be imposed on assets held by a decedent based upon the difference in their tax basis and their value at the time of death. Even without an immediate tax, it is likely that assets passed down to generations will have a continuing tax basis, unlike the system at present where the basis of assets is automatically increased to their value at the time of a person’s death. As is already somewhat the case, planning for income taxes will supplant traditional estate tax planning. In any event, asset protection objectives will result in the continued viability of trust planning, even if tax considerations are eliminated altogether.