Tax reform is one of the central components of Donald Trump’s platform. In many respects his goals for tax reform are aligned with those described in the Tax Reform Task Force report issued by the House Republicans last summer (the House Republicans’ Plan). We don’t yet have a clear understanding of the details of Trump’s tax proposals (the Trump Tax Plan) or a prediction as to which parts of his proposal will be enacted. But the continued Republican control of the House and the Senate make it likely that at least some combination of the Trump Tax Plan and the House Republicans’ Plan will become part of our tax law sometime next year. Because of a Senate procedural rule, it is possible that the tax changes that are adopted will be temporary, as the Bush tax cuts enacted in 2001 were.
Here is a list of the provisions of both the Trump Tax Plan and the House Republicans’ Plan that, if enacted, will be likely to have the greatest impact on individual taxpayers.
Repeal of the death tax: Trump has made it clear that he wants to repeal the estate tax. It is not clear whether he would also propose to repeal the gift and generation-skipping transfer tax. The House Republicans’ Plan eliminates the estate and generation-skipping transfer tax and says nothing about the gift tax. Until we know whether repeal will occur, and how broad that repeal will be, you may want to continue to implement estate planning strategies that do not have a significant risk of attracting a gift tax. Even if the estate tax is eliminated, if the gift tax remains, you may want a way to make funds available to your beneficiaries before your death.
Because it is difficult to predict what form repeal would actually take, and whether, if enacted, it will last beyond the Trump presidency, it is important to build flexibility into your estate plan. You may want to give the individual who holds your power of attorney an expanded power to make certain changes to your estate plan in response to changes in the tax law. This power, for example, could be used to change an outright bequest to a spouse to a gift in trust if repeal occurs before your death and at a time when you no longer have the capacity to make changes. An outright gift to your surviving spouse will not increase your family’s estate tax burden under current law. But if your death occurs during a year in which there is no estate tax and the death of your spouse occurs after the estate tax has been restored, a gift to your spouse in trust rather than outright could save significant taxes for your family.
Tax on unrealized appreciation at or after death: The Trump Tax Plan on unrealized appreciation at death is not spelled out clearly. As described on his website, his plan states that “capital gains held until death and valued over $10 million will be subject to tax. . . .” This statement does not tell us whether the tax will be imposed on the death of a decedent or at a later time when the decedent’s beneficiaries sell the appreciated property. The House Republicans’ Plan leaves the basis adjustment at death (commonly referred to as a basis “step-up”) in place.
If the Trump Tax Plan taxes unrealized gain at death, lifetime transfers may be able to avoid that gain. If it does not tax unrealized gain at death, but merely requires that beneficiaries take a carryover basis, tax planning will be important to avoid burdening beneficiaries with capital gain taxes in excess of the value of their inheritance (for example, due to debt encumbering the inherited property).
The elimination of basis step-up at death could result in the imposition of additional taxes on your estate if you have created grantor retained annuity trusts (GRATs) or have sold appreciated property to grantor trusts for notes. There are provisions that could be added to your current wills that, under current law, would eliminate this risk.
Cap on itemized deductions: The Trump Tax Plan includes a provision limiting an individual’s itemized deductions to an annual $100,000 amount ($200,000 for joint returns). This limitation would impose a significant restriction on the use of the charitable deduction. The House Republicans’ proposal eliminates all itemized deductions other than the deduction for home mortgage interest and charitable gifts.
To protect against the possibility that Trump’s proposal will prevail on this issue, individuals who plan to make large charitable donations over the next several years may want to consider accelerating those gifts into 2016.
Contributions of appreciated assets to private foundations: Trump’s Tax Plan states that “contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.” It is unclear what “disallowance” means and whether this disallowance will apply only on death, or whether it will also apply to lifetime transfers. If you are planning to make significant gifts of appreciated property to your private foundation in the near future, you may want to consider accelerating your gifts into 2016. If you are planning to make substantial gifts at death to a private foundation, you may want to consider adding a contingent alternative gift to a public charity in case you are not able to amend your estate plan if this aspect of Trump’s Tax Plan is enacted.
Tax Rates: The investment and business income of individuals is now subject to a tax rate as high as 43.4 percent (23.8 percent in the case of long-term capital gains and qualified dividends), including the 3.8 percent tax on net investment income. The Trump Tax Plan would decrease that top tax rate to 33 percent (20 percent in the case of long-term capital gains and qualified dividends). At one time, the Trump Tax Plan called for a tax rate of 15 percent on the business income of individuals who earn this income from a flow through entity, such as a limited liability company or subchapter S corporation, but this proposal seems to have been withdrawn. The House Republicans’ Plan would also reduce the top rate to 33 percent. In addition, the House Republicans’ Plan would lower the effective top tax rate applicable to capital gains, interest and dividends to 16.5 percent, and the top rate applicable to the business income of individuals who earn this income directly or receive it from pass-through entities to 25 percent. Both proposals would also eliminate the alternative minimum tax.
If you are contemplating a transaction that would result in the recognition of substantial income, such as the sale of appreciated assets, if feasible, you might want to consider deferring the transaction until 2017.
Minority, Marketability Discounts: Many clients were considering transfers by year end or early in 2017 to capture marketability and minority discounts for interests in non-public partnerships and corporations. The impetus for the transfers was concern that controversial proposed regulations targeted at reducing those discounts could become effective shortly. A significant number of members of Congress had indicated strong opposition to the purpose of these proposed regulations, which we also believe are technically flawed. We now think it highly unlikely that adoption of final regulations in the nature of the proposed regulations would survive the next Congress. It is our view that it is unnecessary to immediately complete any transaction due to concern that the regulations will become effective in the near term, or remain in place if they were finalized.