While it’s clear that President Donald J. Trump wants to scrap the estate tax, it’s not clear what financial advisers should be telling their clients as details about the law’s demise get sorted out.

Mr. Trump has suggested he wants to eliminate the controversial federal estate tax as part of a larger tax plan. While details are sketchy, he has raised the idea of replacing the estate tax with a capital gains tax imposed on inherited assets. Meanwhile, the gift tax — another popular estate-planning tool — likely will remain intact, experts say.

Oh, just one more thing: All this will likely change in 10 years.

Some advisers, such as David Edwards, president of Heron Financial Group, say the estate-tax limbo is already affecting clients’ financial planning.

One of his clients died Jan. 3, and that client’s $800,000 estate-tax bill is now “a question mark,” he said.

Mr. Edwards is telling the client’s beneficiaries that payment of New York state’s estate tax is inevitable, but the federal tax levy is unclear. If Mr. Trump repeals the tax this year, it would likely be retroactive to the beginning of 2017, so the client’s estate may not be on the hook for federal tax.

“For the time being, presume you have to pay that amount of money, and we’ll just keep an eye on things as they unfold,” Mr. Edwards told the beneficiaries.

“It’s one of the few times in my life when I didn’t have a clear read on the future,” he said.

In its current iteration, the so-called death tax is a 40% levy that applies to estates that exceed $5.49 million for individuals and roughly $11 million for married couples. Estates receive a step-up in tax basis upon an owner’s death, which dilutes the impact of capital gains tax for beneficiaries.

“While no one can determine without a Ouija board what will happen … these authors believe that the estate tax is doomed,” Martin Shenkman, the founder of an eponymous law firm; and Jonathan Blattmachr, director of estate planning for Peak Trust Co., wrote in a recent blog post.

History may offer a Ouija board of sorts, though.

The year 2010 marked the only time since the modern federal estate tax was enacted in 1916 that the U.S. didn’t have an estate tax on the books. The repeal was achieved by former President George W. Bush and congressional Republicans as part of a broad agenda of tax cuts in 2001.

But Republicans weren’t able to make the cuts permanent. They were passed under a sunset provision that saw the cuts expire a decade later. So the estate tax was phased out during that 10-year window, disappearing in 2010, only to reappear the following year when politicians couldn’t negotiate for its continued repeal.


Many expect a repeal of the estate tax in 2017 to be similar to the one under President Bush — part of a broader agenda that includes reform of income and corporate taxes.

If Republicans don’t have the necessary 60 votes in the Senate to avoid a filibuster, they could pass tax measures under a budget reconciliation bill, which requires only a simple majority. Republicans have the numbers for a majority but, because of a mechanism called the Byrd Rule, a bill passed under reconciliation will expire after 10 years.

Tax legislation under budget reconciliation is likely to happen this year, around August or September, as part of the federal budget process, according to Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.

Although the estate tax doesn’t apply to many Americans, it’s politically polarizing, with Democrats opposed to scrapping it because of their general philosophy of keeping wealth disparities in check.

There were nearly 12,000 estate tax returns filed in 2015, generating $17.1 billion in revenue for the government, according to the Internal Revenue Service.

Because of diverging political philosophies regarding the tax, a filibuster-proof supermajority probably isn’t in the cards. Republicans likely will push for an outright repeal of the tax under a reconciliation bill, as opposed to the phase-out strategy under President Bush.

“It’s either going to be here or it’s not,” said Richard Behrendt, director of estate planning at Annex Wealth Management and a former IRS estate tax attorney. Given that the tax, in its current iteration, already applies to so few people, phasing it out “doesn’t seem like a compromise to me,” he said.

One question that could have a large bearing on estate planning for clients: What will happen to the step-up in basis at death?

The step-up works like this: If an investor buys a stock at $10 per share and sells it at $20, the investor would pay tax on the appreciation. However, if the stock is held until the investor’s death, it would pass to a beneficiary as if it were originally purchased for $20, eliminating capital gains tax.

An estate-tax repeal, though, would bring a few alternate scenarios into play. As part of the tax plan he proposed during his campaign, Mr. Trump suggested getting rid of the step-up and instituting a Canadian-style approach to taxing capital gains at death — in Mr. Trump’s plan, capital gains valued at greater than $10 million.

Or, legislation could reintroduce the idea of carryover basis, as in 2010. This system also eliminates the step-up in basis and institutes a capital gains tax. However, rather than apply the tax at the owner’s death, the tax applies when the beneficiary sells the asset.

In 2010, a beneficiary was allowed to apply $1.3 million of “free basis” to appreciated assets to limit the tax hit, according to Beth Shapiro Kaufman, president of Caplin & Drysdale and a former member of the Treasury Department’s Office of Tax Policy. A surviving spouse received an additional $3 million in free basis.


Eliminating the step-up in basis would be “an even bigger issue” than an estate-tax repeal, said Michael Greenberg, an associate at the law firm Keane & Beane. Greenberg and others expect this would change planners’ focus when working with clients.

“It becomes about basis planning. Who gets what asset becomes more important,” said Charlie Douglas, director of wealth planning at Cedar Rowe Partners.

However, the last time the House of Representatives passed an estate-tax repeal bill, in April 2015, it kept the step-up in basis, and Speaker Paul Ryan’s proposed measure appears to do so as well, according to Ms. Kaufman.

“If they’re willing to give up the [tax] revenue, that would seem to be a very possible outcome here,” she said.

Analysts almost unanimously agree that the gift tax would remain intact if the estate tax were killed. (The gift tax stayed in place in 2010, for example.)

If both the estate and gift tax were to disappear, it would open up the potential for “games,” Mr. Behrendt said. Family members in high tax brackets, for example, could gift highly appreciated assets to those in a lower bracket and have them sell the assets in order to pay a lesser amount of capital gains tax, then gift the assets back to the original family member.

“I would expect the gift tax to be kept in place” to prevent this abuse, Mr. Rosenthal said. “However, I think the Republicans are particularly ambitious this time around. I think they’ll cut as many taxes as they can get away with, more so than last time.”

Despite the overwhelming uncertainty around the estate tax’s fate, given the variables at play and the political horse trading yet to occur, planners recommend being pro-active where possible.

“I think most people are taking a wait-and-see approach, and I think that’s a cop-out,” Mr. Shenkman said.

Ms. Kaufman advocates planning in advance for the possibility of a repeal of the estate tax. For example, she is advising that wills include alternative provisions for the different scenarios: one disposition if the estate tax is in effect when someone dies, and another if it isn’t.

Article Created by InvestmentNews