Death Taxes in the Trump Era
As of this writing in mid-February 2017, President Trump has not yet announced his tax reform plan. When he does, it is expected to address, among many other things, the estate tax, otherwise commonly referred to as the “death tax.”
As has been well publicized, Mr. Trump has issued numerous executive orders which are actions that can be taken unilaterally by a President. This is not true about changing federal tax laws. These must be changed by legislation passed by both houses of Congress and signed into law by the President.
It is widely anticipated that Mr. Trump’s tax plan will include some form of a repeal of the “death tax”. What is not understood is how and when the repeal will be implemented. Will it be effectively immediately? Retroactive to January 1st? Delayed to January 1, 2018? Phased in over several years? (this is how President Bush’s tax plan addressed it).
Other unanswered questions are whether the estate tax will be replaced with another tax at death, specifically, a capital gains tax and, if so, at what asset levels and what rates.
While it appears that some very wealthy folks will benefit from a repeal of the estate tax, prior laws passed by Presidents Clinton, Bush and Obama, have already effectively repealed the estate tax for the vast majority of Americans whose estates are under $5 million (or $10 million for married couples).
In 2011, the Federal Estate Tax Exemption was $5 million and was set for annual inflation increases. Since 2011, there have been small annual increases. In 2017, under existing tax laws, the Federal Estate Tax Exemption has been increased to $5,490,000. This means that, even before any Trump tax law changes, any individual who passes away in 2017 can give away $5,490,000 (less any taxable gifts made during their lifetime). For married couples, each person can give away $5,490,000; therefore, a married couple, has a combined $10,980,000 they can give away federal estate tax free.
Unlike the Federal Estate Tax, the annual gift tax exclusion did not increase in 2017. Therefore, an individual can still give $14,000 per person, per year. If an annual gift to any individual exceeds $14,000, the gift must be reported on a Gift Tax Return, Form 709 and the overage is applied to and reduces the Federal Estate Tax exemption at death. But since the Federal Estate Tax law and Federal Gift Tax law are interlinked, under existing law, an individual can give away in 2017, a minimum of $5,490,000 in gifts before a tax is due on those gifts.
As with many tax laws, the devil is in the details when it comes to estate and gift tax laws. Accordingly, if you wish to undertake a significant gifting strategy in 2017, be sure to work with an experienced and qualified tax planner.
