An Uncertain Future: Trump’s Plan for Estate and Gift Taxes

It’s over, and Donald Trump won. So, what does the next four years have in store for your estate plan? Short answer: it depends. Estate planning in North Carolina may change.

Donald Trump’s platform included a plan for tax reform which would ultimately repeal the Estate and Gift taxes, the current exclusion amount being $5.45 million ($10.9 million for married couples), unified, and tied to inflation. 2017 will see those numbers grow to $5.49M and $10.98M respectively. The current estate tax rate is 40%, which could be devastating for family businesses and farms.

With such high exclusion amounts, most families will never need to worry about tax-based estate planning. An added benefit in the current tax code for estate planning purposes is the step-up in tax basis that beneficiaries have in assets they receive from someone’s death – and that particular benefit throws a wrench in the estate tax repeal process.

The easiest, but least likely, way to do away with the estate and gift taxes, from a bill drafting perspective, would be to simply repeal them both outside of a more comprehensive tax reform plan. However, even with Republican control of the federal government, that sort of plan will see stiff resistance. So, compromise will be necessary – which is what happened in 2011 when the exclusion amount was set at $5M after a full year without an estate tax in 2010 (as part of the economic recovery at the time).

Instead, Trump’s plan is to replace the estate and gift tax with a reformed capital gains tax – a change to the step-up benefit mentioned above. The idea is that the estate and gift taxes would go away, but assets with potential capital gains of $10M or more would be subject to capital gains tax. You may be thinking: “so he plans to trade one tax for another? What’s the point?” Well, there’s a big difference between those two taxes.

As I mentioned above, the current estate tax rate is 40%, meaning for every dollar of estate value over $5.45M, your family is paying the federal government $0.40. Under Trump’s proposal, all transferred gains under $10M would transfer tax free, and every dollar over $10M would be taxed at the federal capital gains rate, which is currently 15-20% for long term gains.

Just for example, let’s compare $11M in value under both plans, assuming a single individual is passing the property rather than a married couple.

1. Under the current estate tax plan, without proper tax planning, $5.55M would be subject to estate tax at 40%, meaning the family would be paying the federal government $2.22M in estate taxes and would receive a net value of $8.78M from the decedent’s estate.
2. Under Trump’s proposal, $1M in value would be subject to capital gains tax at either 15% or 20%, depending on the beneficiary’s individual tax rate. Assuming 20%, the beneficiary would have to pay the federal government $200,000 in capital gains tax, and would receive a net value of $10.8M from the decedent’s estate.

So, even though it seems like he’s just switching one tax for another, the impact could be significant for families of moderately high wealth, small business owners, and farmers. As you add more value to that $11M number, the disparity increases even more.

While it’s likely some sort of estate tax reform will happen during Trump’s first two years – while he has a Republican House and Senate – what the reform will entail and when it will happen is unclear. To muddy the water even more, there’s no guaranteeing the estate tax wouldn’t be reinstated whenever the Democrats retake control in the future.

This underscores the importance of establishing a long-term, client-centered relationship with your Estate Planning lawyer. Changes in the law can have a significant impact on your plan, and it’s important to make sure it stays up-to-date.