By Cheryl J. Schaffer, CPA, MST, AEP® and Kevin Wiest, CPA, MST
Wright Ford Young & Co.
Estates and Trusts Partners
At first glance, the Framework that President Trump has outlined for the Estate Tax is simply this: repeal of the Estate Tax and its cousin, the Generation Skipping Transfer Tax (GSTT). The complexity lies in the rich political history behind the Estate Tax, in what little details are provided, and what the Framework does not say. In this brief article we will alert you to the important details, point out the silent mysteries, and provide you with some direction for planning in this uncertain environment.
The proposed Framework repeals the Estate and GSTT, but under the Byrd rule the Estate Tax could be reinstated after a 10 year period. You may recall precisely this outcome when the Estate Tax was repealed for just one year, in 2010. Thus, if your life expectancy is more than 10 years, and your assets are worth more than about $5,500,000, the proposal may offer little or no relief at all.
Historically when the Estate Tax has been repealed (as recently as 2010), it is replaced by a modified capital gains tax on assets held at death, payable when the heir sells the asset. The Framework gives us no hint whatsoever if this might be the future for America. Thus, if you should die in the 10 year period, it is entirely unclear whether or not your assets will be subject to a capital gains tax, and when that tax might be due.
The Framework repeals a very valuable income tax deduction for Estate Tax paid on income-producing assets, like inherited retirement accounts and inherited promissory notes. This could cause an asset inherited from a decedent who died prior to repeal to pay both Estate and Income Tax on the asset, resulting in a total tax rate of about 75%!
The framework is also silent about how Trust and Estate Income Tax rates would change. Currently Trusts and Estates are faced with the highest Income Tax burden of any entity! There is no hint in the framework about relieving Trusts and Estates of their high rates, though there is discussion in the framework of eliminating deductions, like investment interest. Thus, enactment could result in a substantial increase in Income Tax under the proposal.
In addition, the Framework is silent about the Gift Tax, though Trump advocated repeal during his candidacy.
What you can do to protect your assets, your business, and your heirs:
Many taxpayers are more concerned about the continuity of their businesses and avoiding making their heirs into “Trust Babies” than the effect of estate taxation. No matter what the Estate Tax regime might be, it is important that your Estate Plan provide for these non-tax issues. Thus, estate planning is as important as ever!
With regard to navigating through the uncertain tax regime, tools like 10 year Grantor Retained Annuity Trusts and Qualified Personal Residence Trusts payable to Grandfathered GSTT Trusts during the 10 year repeal may provide the best of both worlds: If you die during the repeal term, the assets are not subject to Estate Tax. If you die after the term, all or a portion of the assets will escape the Estate Tax and GSTT. These are just two of the many tools that could be implemented during these uncertain times.
Since 1916, the Estate Tax Exemption has changed more than 30 times! Last year, certain Regulations involving transfers of businesses were proposed, and just recently re-withdrawn. One thing you can bet on: Uncertainty is a certainty!
We have guided our clients through hundreds of Estate Planning transactions resulting in millions of dollars in savings. We remain ready to point you in the right direction. Please contact us at firstname.lastname@example.org to see how Wright Ford Young & Co. can help you!
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