Now that Donald J. Trump has become the President, the question we get asked the most is whether estate taxes will be repealed under the Trump administration. The answer is simple: we don't know.
One of the issues with the possible repeal is who will benefit from an estate tax repeal. First, though, here are some facts.
An estate tax return (Form 706) is generally only required to be filed for two reasons. First, if the person who died owned assets with a gross value in excess of the amount they can leave estate tax free at death, a Form 706 needs to be filed, even if no estate taxes are due. For the last several years, the amount that could be left estate free was as follows:
A second reason for filing a Form 706 is if there is a surviving spouse and the deceased spouse did not use up all of his or her exemption amount. In that case, the surviving spouse can file a Form 706 and carry over the deceased spouse's unused exemption amount so that the survivor can add that amount to what he or she can leave estate tax free at his or her death.
In 2014, there were only 11,931 Form 706s filed with the government. Of that amount, only 27% of estates with a gross value of $10 Million or less paid estate taxes.
The total gross values of estates worth $5 Million or less was $5.4 Billion, while the total gross value of estates worth $50 Million or more was $50.1 Billion.
Estate taxes collected in 2014 totaled $16.4 Billion.
In 2015, only 4,918 estates filing Form 706s paid estate taxes, totaling $17 Billion in estate taxes. This is less than 1% of federal revenue. About 44% of the estate taxes collected (i.e., $7.4 Billion) was paid by the 266 estates valued at $50 Million or more.
Therefore, if you look at who stands to benefit from an estate tax repeal, it would be a relatively small number of estates, compared to the number of persons dying annually in the US.
But let's take a look at what a Trump repeal of estate taxes might look like in terms of his proposals.
Under Trump's proposal, the estate tax would be repealed in its entirety. In addition, the generation-skipping transfer tax and the gift tax would be repealed.
Under the current law, beneficiaries may, in general, sell an inherited asset without paying any capital gains taxes. This is because assets included in the decedent's estate receive a "step-up" in basis to the asset's value at the decedent's date of death. Without a step-up in basis, the beneficiary would pay the same capital gains tax the deceased would have paid if the deceased had sold the asset.
Trump's proposal would allow a step-up in basis on inherited assets valued at approximately $5.49 Million, which could then be sold with no capital gains. For estates with assets valued at more than the $5.49 Million, the excess values would be subject to a capital gains tax when assets are sold.
It is possible, however, that instead of waiting until someone inheriting an asset sells that asset, Congress could adopt a version of the Canadian tax law which instead imposes a smaller capital gains tax at the deceased's death on the basis which would have been stepped-up.
If the estate tax is repealed, it could either occur immediately or it could be a gradual repeal over several years.
Remember, Congress passed a law in 2012 that basically established a permanent estate tax with relatively high exemption amounts, as seen above. To repeal the estate tax at this time could be politically risky for the President because it would look like (and actually would be) a direct benefit to his family.
Gift Tax Repeal
With respect to the repeal of gift taxes, those taxes are intended to ensure, for example, parents cannot shift income-producing assets to a child in a lower income tax bracket so less income taxes are paid by the family. When the asset stops producing income, the child could then gift the asset back to the parents without any tax consequences.
Therefore, the repeal of gift taxes could have far-reaching consequences in terms of income taxes paid.
While we do not know whether there will be an estate tax repeal, we do know that you should continue to meet with your estate planning attorney periodically to make sure that your estate plan continues to meet your objectives. For example, do the following provisions in your estate plan still make sense?
- The persons who are named as trustees in your living trust are still the persons you want to take care of your estate.
- The ages at which your beneficiaries are to receive their inheritances still makes sense, given how they have matured financially (or not matured).
- You still want to name the same person as guardians for your minor children.
- You still want to name the same persons to make medical decisions for you if you cannot make them for yourself.
- Do you want to set up trusts for your children to better protect their inheritances from lawsuits, divorces and future estate taxes?
Please let us know if you have any questions.