Estate planning strategies before Congress acts on tax reform
Estate planning has once again entered the realm of uncertainty.
We do not know if there will be new legislation regarding the estate and gift tax, nor do we know when such possible legislation will take place (if ever). For example, if the estate tax is repealed, will the estate tax cease immediately or as of some future date; or will the estate tax be phased out over a number of years? If there is a repeal, how long will the repeal last (viewed from both the perspective of the text of the new legislation, and the possibility of a political shift that could result in more new legislation)?
Planning for “if” and “when” is challenging, and estate documents should be drafted with as much flexibility as possible to account for the unknown. Documents should reflect the consequences of dying with an estate tax in place, dying when the estate tax could be repealed, and dying when the estate tax could resume (either in its current state with 2017 exemption amounts, or in an altered state, with different exemption amounts).
President Trump has indicated that the estate tax could be replaced with a capital gains tax at death, eliminating the current step-up in basis system. This could cause an administrative nightmare, as many investors do not have cost basis documentation (especially for assets purchased before the internet was established). Thus, it would be a good idea for estate planners to begin to determine how to collect data that documents the cost basis of their clients’ long-held assets.
Estate planners should also err on the side of caution when it comes to discounts. Proposed regs under Code Section 2704 that were issued in 2016, and which may or may not become final, indicate the IRS is going to be stricter when looking at valuation discounts for family-owned businesses. While we are not sure if these proposed regs will be finalized (as is, or amended), it is probably a good strategy for estate planners to avoid taking large discounts for valuation purposes until we know more. Valuation discounts are still important when considering gift tax (which seems less likely to be repealed), so this issue could still be relevant even if the estate tax is repealed.
And then there are those non-tax strategies that people should be employing, that will not change even if tax legislation does. These strategies, such as planning for guardianship and health care decisions in the event of death or incompetence, and asset protection and management, are essential for all people, regardless of wealth. People will still need wills and trusts so their wishes are carried out and their assets are protected for future generations.