Tax Reform Watch: Estate Planning Still Necessary Despite Uncertainty – March 17, 2017 by Andy Whitehair

As much as President Trump and Republicans would like to repeal the federal estate tax, i.e., the "death tax," repeal is highly unlikely given that Republicans simply do not have enough votes in the Senate. Most likely such repeal would be part of the reconciliation process under which there would be a sunset provision similar to what occurred in 2001 under the Bush Administration. This means the estate tax may vanish temporarily, only to return later. Given the uncertainty of estate tax repeal, individuals may be tempted to take a wait-and-see approach to estate planning. However, this is not the best approach. 

  1. First, there are many non-tax reasons for estate planning such as probate avoidance, controlling the amount and timing of asset distributions, providing for disabled and minor beneficiaries, achieving philanthropic goals, business succession planning and asset protection, just to a name a few.
  2. Second, even if the federal estate tax is repealed, 18 states currently have some form of estate or inheritance tax. Proper advanced planning may still be necessary to reduce and/or eliminate the state estate tax burden.
  3. Third, assume the estate tax is eliminated but returns in the future when a new Congress seeks to undo previous tax reform efforts with which they disagree. The estate tax may come back in a less favorable form. Currently, an individual's lifetime exemption, meaning the amount he or she can give away during life and/or at death, sits at $5,490,000 with a 40% tax rate. As recently as 2003, the exemption was only $1 million, and for much of the 1980s and 1990s the tax rate was 55%. A taxpayer may not always be able to count on the current favorable exemption amount.
  4. Lastly, a taxpayer with a highly appreciating closely held business who takes a wait-and-see approach may find that the value of the business has doubled or tripled during the wait. Acting now to shift wealth out of a taxpayer's estate can save significant dollars in the future. 

Even before the recent estate tax legislative uncertainty, one of the key estate planning goals was to provide taxpayers with significant flexibility in their plan. Limited power of appointments, trust advisors, providing for the ability to decant or change trust situs and giving wide discretion to trustees are some of the tools available to provide flexibility that reaches far into the future. Giving next generations the ability to react to changing family dynamics as well as tax legislation is important regardless of the current uncertainty.

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Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.