The most important question is whether estate tax repeal will actually occur, and if so, will it be permanent or will it be similar to what happened in 2010 when it was only good for one year?Even if repeal is included in the anticipated tax overhaul package in order to pass through the Senate, Republicans will need 60 votes, which may prove difficult. As a result it may be wise to consider establishing two estate plans. One for if the estate tax is eliminated and another for if it’s reinstated.
Both Trump’s campaign plan and the House blueprint have been silent on the fate of the gift tax. Even if it’s retained, there is no certainty regarding what the rate or exemption amount will be. The current gift tax exclusion is $14,000 per donee. That is separate from the $5.49 million lifetime estate and gift tax exemption in 2017. Like the estate tax, the top gift tax rate is 40 percent. While it’s unlikely that the gift tax will be eliminated, it may change. Industry leaders at the recent Heckerling Institute on Estate Planning tend to agree that the gift tax rules will continue, but they also said “you never know”.3. Capital gains at death?
Another uncertainty is whether the estate tax would be replaced by a capital gains tax for assets held until death. Trump’s proposal indicates this would occur for estates with assets of more than $10 million. However, it’s unclear if this is the combined value for married couples or if each individual would have a $10 million exemption.
Additionally, if there is a capital gains tax, it’s unclear whether it would be triggered automatically upon a decedent’s death or when the beneficiaries dispose of the assets.
4. Will basis step up, down or disappear?
Another looming question, how – or if – a popular income tax benefit known as basis step-up would apply under a capital gains system. Currently, when a person dies, the heirs of the estate are entitled to a stepped-up or a step-down in basis. This is the increase or decrease of the fair market value at the date of death compared to the decedent’s basis. This means the heirs would only pay taxes on any additional appreciation of the value from the date of death until the asset is sold.
Since Trump has proposed a $10 million exemption, is there a step-up in basis on the first $10 million?
5. Special rule for businesses, farms?
Trump’s proposal said that capital gains on assets held until death and valued over $10 million will be subject to tax with the $10 million exemption to help exempt small businesses and family farms. It’s uncertain whether Trump meant to apply the $10 million exemption only to small businesses and farms, or if it also applies to taxpayers who have marketable securities and cash.