Summary

Following the results of last Tuesday’s election, there is significant speculation about the status and future of the tax code in light of President-elect Donald Trump’s proposed tax reform plan.  Much of this speculation is largely that, speculation. We do not know exactly what will occur after Donald Trump assumes the presidency in 2017; we only know Donald Trump’s campaign website does present an outline of a tax reform proposal which includes changes in multiple areas of the code and would ultimately, if adopted in its current form, overhaul major portions of the tax code, including income tax, federal estate and gift tax, generation skipping transfer tax and corporate tax. 

Much of the chatter surrounding President-elect Trump’s tax reform stems from a potential repeal of the federal estate tax, as proposed in his campaign website. Given that the federal estate tax applies only to those individuals whose taxable estates exceed the current federal estate tax exemption of roughly $5.5 million, the majority of the U.S. population will be relatively unfazed by the repeal. Regardless, it cannot be denied that a repeal of the federal estate tax is significant, especially in light of the significant tax savings that will result for high net worth individuals and their families for multiple generations. President-elect Trump’s proposed repeal of the federal estate tax is also accompanied by a repeal or abolishment of the step-up in basis for assets owned and transferred to heirs or other beneficiaries at death. If the step-up in basis is repealed as well, individuals and families who inherit assets will receive the same basis in those assets that the decedent had at the time at which he or she acquired the assets. Therefore, if an asset has appreciated over time since the decedent acquired it, his or her heirs would be expected to pay the capital gains tax on the subsequent sale of the appreciated assets. It is noted that President-elect Trump’s proposed tax plan may contain some form of exception for capital gains that are under a specific amount or on certain small businesses and what he has referred to as “family farms.”

The details of the repeal of the federal estate tax and the step-up in basis are largely unknown and therefore we caution that any advice provided here is educated speculation. Additionally, President-elect Trump has already hedged on several of his campaign’s hardline proposals; therefore, we are not in a position to recommend any particular planning or specific course of action at the immediate present because we do not know if he will actually seek to implement those proposed changes to the tax code that he proposed as part of his campaign. We feel strongly that the basic concepts of sound estate planning will not change regardless of revision to the tax code.  The transfer of wealth continues to be a very important issue. The need for sound estate planning will remain consistent in order to preserve family wealth for multiple generations regardless of whether there exists the federal estate tax or not. Although the potential repeal of the federal estate tax may cause less complicated tax planning to be necessary in the immediate future, there is certainly a possibility that if one tax is repealed, another may be instituted in its place on the assessment of wealth transfer. With change comes a number of unknown and potentially limitless possibilities for planning and potential opportunities to make efficient tax transfers.