With a new President set to take the oath of office in less than two months, it’s only natural for the nation to hold its collective breath as it waits to see how the changing political scene will impact the lives of businesses and individuals across the United States. Already, however, one component of the incoming President’s campaign platform has many estate planners wondering how their clients’ plans will look in the coming years. The issue once again involves the Federal Estate Tax, and President-Elect Donald J. Trump’s promise to seek its repeal.
For Michigan families, like families everywhere across the country, the estate tax issue can sometimes seem like a perfect substitute for insomnia remedies. Few issues seem to generate less interest than this federally-imposed tax that affects only a small number of estates each year. For politicians, family farmers, and small businessmen, however, the estate tax is one of those issues that generates heat every time it’s mentioned. The reality is that this is an important issue for many millions of Americans, including families engaged in serious estate planning and the attorneys who represent their interests.
The Estate Tax Today
For 2017, the estate tax will apply to all estates valued at more than $5.49 million – or $10.98 million for couples. Any amount of wealth over that exemption limit will be subject to a 40% tax rate. Under the existing rules, the assets in the estate do receive the benefit of a stepped-up-basis that eliminates worries about capital gains when wealth is passed on to the next generation, but that estate tax applies nonetheless. For those whose estates are large enough to trigger the federal tax, estate tax mitigation is often one of the primary objectives of estate planning efforts.
The Trump Promise
Candidate Trump ran on a pledge to eliminate the estate tax altogether. That came as a welcome relief to most Republicans, who have long opposed higher taxes of any kind as a matter of principle and for whom the estate tax was particularly odious in nature. In fact, it was Republicans who long ago dubbed the estate tax with the “death tax” moniker, as a reminder to voters that the wealth being taxed has in many cases already been subject to a wide variety of taxes levied by different levels of government. For those Republicans, the estate tax is not just seen as a form of double-taxation; it is viewed as a wealth redistribution scheme designed to keep family farmers and small business owners from creating wealth that can survive through multiple generations.
Trump’s proposal stood in direct opposition to Democratic nominee Hillary Clinton’s promise to expand the reach of the estate tax by lowering the exemption to $3.5 million and increasing the tax rate to as much as 65%. That plan would have seen many estates that are now excluded from the tax suddenly vulnerable to its provisions.
Under the Trump plan – as explained on his campaign site, the estate tax gets repealed in its entirety. However, the stepped-up-basis that currently protects estates from capital gains tax liability would end for capital gains valued at more than $10 million. That ten-million-dollar threshold was selected to shield family farms and small businesses from the tax. In addition, the proposed plan would prevent the deceased and his relatives from trying to escape the tax by giving appreciated assets to any charity of their creation. The latter proposal is designed to limit abuse.
What’s Likely to Occur?
Given that the Republicans control the Senate by a slim margin, the preferred Republican proposal for estate tax repeal would likely be blocked by a filibuster. That proposal would involve an end to the estate tax, and continued protection against capital gains taxes. Given that the Democrats are on record as preferring an estate tax that applies to even more Americans, the Republicans are unlikely to see any progress toward that total repeal solution.
Trump’s plan, however, could be a compromise amenable to both sides of the aisle. Yes, it would repeal the estate tax altogether, but its reliance on a 20% capital gains tax would at least give the Democrats some of what they want. Meanwhile, Republicans who want estates free from all taxation could declare victory with a compromise that effectively cuts the tax in half – especially if protections are implemented for small businesses and family farms.
Alternatively, Republicans could opt to pursue total repeal through the budget reconciliation process, which would require only a simple majority for passage. However, it is likely that the latter option would only be pursued if Senate Democrats refuse any compromise and steadfastly insist on maintaining the tax as it currently exists.
What Can You Do to Protect Your Interests?
If you have an estate that could be subject to the estate tax – or that may need planning to minimize any potential future capital gains taxes that may on the horizon, it’s important to remain vigilant to how political action at the federal level impacts your estate planning needs. A new administration always means big changes, and sound planning is always the best way to take advantage of the opportunities that those changes provide. Your Michigan estate planning attorney can be an invaluable resource to help you ensure that your interests are safeguarded against unexpected legal changes to any aspect of the tax code.
At Biddinger, Bitzer & Estelle, PLLC, we work hard to stay abreast of all the latest changes in estate tax and estate planning law so that you don’t have to. Our estate tax planning experts will work with you to ensure that you have the most up-to-date information and advice available to enable you to make the best-informed decisions that you can. While we might not yet know what the estate tax will look like in the coming years – or even if there will be an estate tax at all, we do know that we’ll be here for you to help protect your family’s wealth. To learn more about how you can safeguard your interests with estate planning strategies that work, contact us at our website or call us today at (989) 872-5601.