death of the death tax? what would repeal of estate tax mean for you and me?
The Republicans have been talking about and working on repeal of the federal estate tax for years. Now that Trump is on his way to the White House, there are many who believe that the federal estate tax (also known as death tax) will soon be a thing of the past.
In theory and principle, repeal of the federal estate tax seems like a good idea. While it can sometimes be a polarizing political issue, the majority of people abhor the concept of a “death tax” inasmuch as we abhor taxes generally and we especially dislike the idea that upon the death of a person, the government should swoop in and refill its coffers from the assets of the deceased person. I recognize that this horrible situation I have just described is divorced from reality in most instances–as the federal estate tax, in its current iteration, effects a very, very small percentage of Americans. In fact, at the present time, a person can pass $5,490,000 of assets to others upon his or her passing free of federal estate tax. Further, a married couple can jointly pass double that amount (with “portability”) to their heirs free of federal estate tax. Even so, estate tax is not a popular thing and it would seem that the repeal of the same would be music to a great many ears.
How likely is it to happen? Well, that really depends on who you ask. I was in Florida last week at a national conference for attorneys, CPAs and financial advisers and the consensus among the “experts” there seemed to be that repeal was more likely than not. There are a good many Congressional procedural hurdles clear before estate tax repeal could become a reality. But some have suggested that it might come as part of the budget reconciliation bill that will be hammered out in the next few months. This would be filibuster immune and would provide a handy mechanism for Republicans to fast-track their repeal plans. We can be confident that President Trump would sign such a law without delay, inasmuch as repeal of the federal estate tax has been one of the promises of his campaign.
What would it mean to have the estate tax repealed? Would it also signal the end of estate planning as we know it? Isn’t it true that the main reason for estate planning is to avoid estate taxes? The answers to those questions are, in order, “good question”, “no” and “no”. It is unclear exactly what might replace the estate tax, if it were repealed, and whether there would be corresponding adjustments to the gift tax, GST and/or tax on capital gains. So in order to understand what estate tax repeal would look like, we first need to understand the nature of any corresponding adjustment to other taxes.
As far as the effect of estate tax on most estate planning, the reality is that more than 90% of people do not have a large enough estate to have reason to concern themselves with estate tax. By far, the substantial majority of my estate planning clients are in a similar situation and the planning we have done has really had very little to do with estate tax considerations (given the current federal estate tax thresholds). Rather, almost every estate planning client of my firm does estate planning because of such concerns as proper family planning, disability planning, business succession, probate avoidance, special needs beneficiaries and generally to ensure that they are able to make key decisions (now and later) with regard to their property and their family members (and other people and causes which are near and dear to their hearts).
So no, estate planning will not end with the repeal of the federal estate tax (if it happens). Rather, much of what we do in the area of estate planning, financial planning, tax planning, business planning and related areas will continue almost in the same manner as before repeal. In addition, there may be many new considerations to be factored into our various planning, including if there is a need to account for different tax regimes introduced in lieu of the federal estate tax. For example, Trump earlier proposed a tax on capital gains over $10,000,000. If this becomes part of the new tax law regime, there would be very important planning considerations for many people. Please remember that if the capital gains tax replaces the estate tax, it may be a political compromise (of necessity) that brings that $10,000,000 threshold down to a much lower amount–one that applies to many more people, including those who are not within the uber-wealthy class.
Finally, please remember that whatever happens in Congress this year, there is nothing that prevents Congress from reversing course and doing something entirely different next year. This reality is just one of many reasons why your planning (estate, financial, tax, business, etc.) should be reviewed periodically so that it can be adjusted, as needed, to conform to the then-current climate of applicable laws and regulations.