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Even With an Estate Tax Repeal, Planning May Not Change

The hot topic of 2017 for estate planning, tax, and financial advising circles is the potential for an estate tax repeal sometime in the near future – either by itself or as part of a larger tax reform package. At the time of this writing, there’s no proposed legislation being considered that will provide that change, but people are speaking of an estate tax repeal as an almost certainty rather than a possibility. But, the way it happens (if at all) will have a substantial impact on how estate planning will change (if at all).

Budget Reconciliation

If Republicans can’t get the votes in the Senate to pass such a change, they may rely on budget reconciliation, which is a procedural way to get a budget bill through Congress without having to overcome a Democratic filibuster. However, because of the Byrd Rule, any change implemented through a budget reconciliation must have a 10-year sunset provision – meaning that if the change isn’t renewed or made permanent through some other bill, it will end in 10 years. Well that doesn’t give families much certainty. I can’t, as a fiduciary to my clients, recommend that people create a plan that doesn’t consider the estate tax if there’s a potential for it’s return in 10 years. Good luck pinpointing your date of death and hoping it falls within that 10 year window. So, the same planning techniques would still be used as if the change was never even made.

Full Repeal

If the estate tax is fully repealed without the issue of a sunset provision, clients can have some additional confidence to plan without considering estate tax – at least reinstating the estate tax would likely take a full sweep of DC by the Democrats, which isn’t beyond the realm of possibility. But, politics is very fluid and the tides of public opinion change daily. The same concerns with budget reconciliation can equally apply to full repeal. What’s to say it doesn’t take less than 10 years for a full sweep and reinstatement of the estate tax? Nobody knows. But again, the same planning techniques would likely still be used as if the change was never made.

What About Gift Tax and Generation Skipping Tax?

The fate of the other “taxes” that may be planned for in estate planning is still very uncertain. Even if the estate tax is repealed, if that’s not accompanied by the generation skipping tax, you may not see any meaningful change to higher net worth estate planning strategies. And in all reality, the higher net worth families are the ones trying to avoid estate tax.

A Happy Medium

One way to “split the baby” with a repeal of any kind may be to embrace planning that focuses on asset protection (LLCs and revocable trusts – which can be shut down or changed) rather than tax planning (irrevocable trusts – which cannot be changed)  with an eye toward changing the plan if (when) needed. It’s much easier to pivot from an asset protection plan to a tax-based plan than it is to have a full-blown tax avoidance plan and unwind everything if the estate tax never comes back. The issue with this sort of planning is that it could potentially be more costly to the client because of the potential for essentially planning twice, and the client may miss out on opportunities to “freeze” the value of assets for estate tax purposes. For higher net worth clients, it may be well worth the fees to make plan for the flexibility of asset protection but have that safety net should reinstatement of the estate tax come down the pike later on.

We Just Don’t Know

The common theme here is uncertainty: we just don’t know what’s going to happen at this point. It will, however, be a very interesting year for estate planning – how often do we get to say that?

Author Bio

Paul Yokabitus

Paul Yokabitus is the CEO and Managing Partner of Cary Estate Planning, a Cary, NC, estate planning law firm. With years of experience in estate and elder law, he has zealously represented clients in various legal matters, including estate planning, guardianship, Medicaid planning, estate administration, and other cases.

Paul received his Juris Doctor from the Campbell University School of Law and is a North Carolina Bar Association member. He has received numerous accolades for his work, including being named among the “Best Attorney in Cary” in 2016 and 2017 by Cary News and Rising Star in 2020-2023 by Super Lawyers.

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