President Trump has now been in office for just over a week, and one thing is clear - there's no anticipating most of what will transpire in 2017 with respect to taxes. While the lifetime Federal estate and gift tax exemption has increased to $5,490,000 ($10,980,000 per couple) for 2017, President Trump has called for the repeal of the estate tax, along with an elimination of the “step-up” in basis of assets held by a decedent at death. Depending on the ultimate details of this proposal, it may result in a capital gains tax on assets at death, such that the appreciation on assets before death will no longer escape tax at death. In addition to the estate tax, a number of tax planning strategies are currently on the endangered list. Before legislation is passed, the time to plan for all of these proposed changes is now.
1. Gifting Using Valuation Discounts. Estate planning often involves transferring wealth to family members using one’s $5,490,000 lifetime Federal gift tax exemption. In the case of transfers of interests in closely-held businesses, valuation discounts are often utilized for estate planning purposes to leverage the lifetime exemption amount. However, the IRS recently issued Proposed Regulations that could have a dramatic impact on estate planning by eliminating valuation discounts. These discounts can be essential for those concerned about protecting a family business from the risks of future divorce, or protecting assets from lawsuits or malpractice claims, by enabling an individual to leverage the maximum amount of assets out of harm’s way, without triggering a gift tax to do so. It is unclear whether and when these Proposed Regulations will become effective, but it is important to note that time may be of the essence for planning. Once the Proposed Regulations are effective, the ability to claim discounts might be substantially reduced or eliminated, thus curtailing tax and asset protection planning flexibility.
2. GRATs and Sales to Defective Grantor Trusts. President Obama’s Greenbook sought to restrict or eliminate grantor retained annuity trusts (GRATs), sales to defective grantor trusts, and more. These strategies reduce estate taxes by transferring the appreciation on assets to a trust for loved ones, at little or no gift tax cost. Now may be the ideal time to create one of these wealth transfer vehicles, as they work most effectively in a low interest rate environment. If the estate tax is repealed, the only cost will have been attorneys’ fees. Whereas, if the estate tax is not eliminated (or is eliminated but later returns) and legislation is passed to restrict or abolish GRATs and sales to defective grantor trusts, an excellent planning opportunity will have been lost. Wealthy taxpayers who do not seize what might be the last opportunity to capture discount planning (see above), might lose much more than just the discounts. They might lose many of the most valuable wealth transfer strategies.
3. IRA Stretch-Out. Under current law, a retirement account with children as designated beneficiaries can be “stretched out” over the heirs’ life spans. A tax bill has been passed that would allow a pay out to next-generation heirs of only five years. The loss of the valuable “stretch IRA” may require a revision of one’s estate plan, whereby other assets would be used to fund bequests to children and grandchildren.
4. Gifts of Appreciated Assets. Individuals in high tax brackets can avoid capital gains tax by gifting appreciated assets to loved ones in low tax brackets. Given the uncertainty of the future of the gift tax exemption, as well as the possible imposition of capital gains tax on death under the Trump administration, this effective strategy should be carefully considered before it potentially disappears, as was proposed under the Obama administration.
One thing is certain in 2017 -- there is increased uncertainty in the trusts and estates arena. Will the estate tax be repealed? Will valuation discounts be eliminated? Will the use of GRATs and sales to grantor trusts be restricted? Will stretch IRAs disappear? In this environment, it is important to anticipate and quickly respond to changes in the law. At all times, Lara M. Sass, PLLC will keep our clients abreast of important developments, and the potential impact on their estate plans. If you have planning needs or concerns, please contact us to discuss the options best suited to your particular needs and objectives.