The federal estate tax system has undergone significant changes over the past 20 years, but the next 20 months may see even more significant change. When George W. Bush was elected in 2000, estates over $675,000 were subject to estate tax and the top marginal rate was 55%. From 2001 to 2010, the exemptions went up and the rates came down, culminating in 2010 when, for one year, there was no estate tax. In December 2010, Congress re-enacted the estate tax with a $5 million exemption (indexed for inflation) and a flat rate of 35%. Presently, there is a flat, 40%, federal estate tax on estates over $5,490,000 (an 813% increase in the exemption from 2000).
Candidate Trump proposed the elimination of the estate tax and the implementation of a plan where “capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms.” It is not entirely clear when beneficiaries would pay taxes on capital gains: when the assets are received from the estate or when the beneficiary later sells the asset. In any event, President Trump’s plan appears to be similar to the system in place in 2010: estate tax replaced with capital gains and an exemption. As we saw in 2010, this system may require significant changes to estate plans which rely on formula-driven tax language and may result in a rather complicated carry-over basis regime with some challenging tracking issues.
At this point, we believe it is too early to make changes to existing estate plans and are recommending a “wait and see” approach. The Trump Administration has not put forth proposed legislation and we suspect that any estate tax reform will involve significant compromise. The last 20 years have been a bit bumpy in the estate planning world, but 2017 may make that uncertainty pale in comparison. Check back for additional information as it becomes available.