Planning for the Potential Repeal of the Estate Tax

December 2, 2017 

Update: 

With the final version of tax reform adopted by the Senate, we can expect that neither the estate tax nor the generation skipping transfer tax will be repealed any time soon.  The basic exclusion amount appears slated to increase to $11.2 million for each taxpayer, starting on January 1, 2018.  Transferring assets to trusts is an important strategy for asset protection and business succession purposes and the doubling of the exemption amounts offer an opportunity to accomplish significant gifting before the probable reversion back to current exemption levels when the current law sunsets on December 31, 2025.  Flexibility will be key in this time of uncertainty. 

November 2, 2017

Since the election of President Trump, there has been intense discussion among estate tax planning professionals as to whether and, if so, when, the new Administration and the Republican-controlled House and Senate might eliminate the federal estate tax.  

Republican lawmakers in the House revealed on November 2 what the New York Times labeled, “the most sweeping rewrite of the tax code in decades.”  Not surprisingly, the plan includes complete repeal of the federal estate tax.  The Senate GOP plan retains the federal estate tax, but the ultimate resolution of this matter is not yet clear.

The chart below summarizes the current law, House proposal, and Senate proposal:

WHAT DOES COHNREZNICK THINK? 

There are some important reasons why ongoing estate planning should continue, including: 

• Transferring assets to trusts is still an important strategy for asset protection and business succession purposes, as well as ensuring that assets will be devised as the owner directs. 
• With the proposed doubling of the exemption amounts in both bills, taxpayers may have an opportunity to accomplish significant gifting after the effective date of the tax plan, depending on the final legislation enacted. 
• The increased exemption may provide opportunities to reduce overall income tax by shifting assets to taxpayers in lower income tax brackets.
• Several states will retain an estate or inheritance tax.  Taxpayers should continue to plan in order to minimize such state taxes, as a repeal of the federal estate tax would mean that there would be no federal benefit for paying state estate or inheritance taxes. 
• Insurance planning remains relevant in order to ensure that there will be sufficient liquidity.  Whether there is an estate tax, we recommend that life insurance always be held within a life insurance trust, primarily for asset protection purposes.  

As Republicans maintain majorities in both houses of Congress, arguably, some form of the current GOP tax plan could be presented to President Trump for signature.  However, the proposals described above are still subject to reconciliation and will likely face revisions. 

Even if some of the legislation is enacted, Republicans hold a slim, 52-seat, majority in the Senate, so the permanence of any such plan is very much in question.  Indeed, by its terms, the Senate proposal requires a reversion back to current exemption amounts of $5.6 million on transfers made after December 31, 2025.  Further, since the House plan does not provide for full repeal of the estate tax until 2024 – after the next presidential election – there is a possibility that a new administration will replace the law before full repeal.  

Given the sweeping nature of the proposed tax changes, it is unclear what the final form of the legislation (if any) will be.  We recommend that taxpayers stay abreast of potential changes impacting their trusts and estate plans, as there may be a limited window for additional planning once the final provisions impacting trusts and estates are enacted.  Stay tuned for upcoming tax updates from CohnReznick relating to other provisions.

CONTACT

For additional information, please contact CohnReznick’s Trusts and Estates National Practice Leaders: 

Joy Matak
862-245-5081
Joy.Matak@CohnReznick.com

Steven M. Dane
959-200-7103
Steven.Dane@CohnReznick.com 

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.