While the Republican tax reform framework clearly calls for a complete repeal of both the estate tax and the generation skipping transfer (GST) tax, the lack of details offered by the plan has created a confusing planning environment for clients—especially high net worth clients.
If one thing is certain, it is that the framework creates an era of uncertainty for clients whose estates would be valued above the estate tax exemption amount (currently $5.49 million per individual).
Despite the fact that the administration has made its support of estate tax repeal clear, estate planners cannot be sure what shape future legislation might take, or whether an estate tax repeal would even be permanent.
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The uncertainty means that developing flexible strategies to minimize transfer taxes remains just as important as ever.
The GST tax is imposed on a transfer of property by a donor to a grandchild or great-great-grandchild through a will or trust.
The tax reform framework proposal would eliminate the estate tax and the GST tax, but it makes no mention of the current federal gift tax structure.
Under current law, clients may transfer up to $14,000 per year to each donee during life without triggering the gift tax. (Spouses may elect split gift treatment, so that the $14,000 amount is doubled to $28,000 per married couple). Lifetime gifts above and beyond this annual gift tax exclusion amount are taxed at the 40% gift tax rate.
Although the framework does not address the gift tax, it is widely expected that some form of the gift tax will remain, in order to prevent income tax evasion. (Evasion could, for example, be accomplished by having a taxpayer make lifetime gifts of property to family members in lower income tax brackets).
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The tax reform framework also makes no mention of the currently existing “step up” in basis that applies to property transferred at death. The step-up rules adjust the basis of property transferred at death so that it equals the fair market value of the property at the date of death. (In other words: The property value used for estate tax purposes.) That system lets heirs avoid paying capital gains taxes on the appreciation in property value that occurs before the heirs eventually transfer the property.
If the estate tax is eliminated, it is possible that the stepped-up basis provisions would also be eliminated—essentially implementing a carryover basis regime that would apply capital gains tax rules to property transferred at death. Others predict that a limited step up in basis could be created to shield only property valued under a certain dollar threshold from capital gains taxation.