Notes on Post-Election Transfer Tax Planning

By: Jennings, Strouss & Salmon, P.L.C.

Prior to the election, we were advising our estate planning clients regarding the bleak prospects of reduced valuation discounts under the IRC §2704 proposed regulations and the potential rollback of the Unified Credit under what many had assumed would be a Democratic administration. My how times have changed. Now we are re-evaluating our various preelection strategies to determine which might still be viable if the Trump administration makes good on its campaign promise of repealing estate taxes. It should be noted that both the Trump tax proposal and the House Republicans “Better Way” plan advocate repeal of the “death” tax. But the provisions governing the repeal seem to differ somewhat. The Trump version would repeal estate taxes, but does not mention GST or gift taxes, whereas the House plan would repeal estate taxes and GST, but does not mention gift taxes.

The Trump tax plan would also impose a capital gains tax on appreciated assets (excluding small businesses and family farms) that are held until death, and are valued at over $10 Million (although it is unclear whether that capital gains tax would be imposed at death or upon subsequent disposition of those assets by the heirs of the estate in the form of a carry-over basis as to those assets). The House plan retains the current basis step-up at death concepts. How these substantial differences are reconciled in the final bill can only be guesswork.

Meanwhile, the 2704 proposed regulations have received much comment and criticism from the business and tax professional community, and, according to most commentators, will likely not get finalized in their proposed form or, perhaps, in any form, in the near future.

Even if Congress and President Trump can reach agreement on the transfer tax repeal or reform, there is no assurance that the Senate can get sufficient votes for cloture under its rules, or that the bill can get through the Senate under the budget resolution or reconciliation legislation exception with less than the required sixty votes. Enactment may take some time and the effective date of the final provisions may be phased in, thus mitigating any benefits of that repeal or reform for transfers that occur prior to full effectiveness of the repeal or reform.

Finally, even if full repeal of the federal transfer taxes is effectuated, those or similar tax regimes may be revived sometime in the future. Any plans implemented before the repeal may, or may not, result in tax savings under any such revived tax regime.

Some of the pre-election planning for clients included proposed inter-family gifts or other transfers. Some clients were motivated to make gifts before the Section 2704(b) regulations could materially alter available discounts. Others had important goals beyond tax savings. Making decisions in a changing environment is always challenging, and each family must consider its own goals in making them. Here are some factors that we suggest you should consider:

1. The perceived value of any and all non-tax benefits arising under the plan, including, perhaps, asset protection, business succession, or asset management issues;
2. The additional costs to be incurred in the implementation of the plan;
3. The annual maintenance and compliance costs and inconveniences relating to the plan;
4. The expected term or duration of the plan;
5. The amount of anticipated disruption or distortion in family relationships associated with the plan; and
6. The impact of any state inheritance or estate taxes to which the client might be exposed.

The decision of whether to proceed with, modify or abandon pre-election planning is not simple and certainly requires individual analysis on a client by client basis. We intend to continue to monitor and analyze these developments, and, particularly, the impact upon estate planning projects that are currently underway. For our clients who do not already have some sort of planning in process, we suggest that you review your current estate plan and consider whether it still reflects your wishes and meets your current needs. If you would like our assistance with that review, please contact us.

Disclaimer: This communication is for informational purposes only, and is not intended to substitute for the reader obtaining and acting upon tax advice that is specific to the circumstances of the taxpayer as obtained from the taxpayer’s own professional.
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The Tax, Estate Planning and Probate attorneys at Jennings, Strouss & Salmon, P.L.C. have decades of experience in successfully advising businesses, business owners and high wealth individuals in structuring transactions to achieve optimum business and tax results, and in defending them in audits and court proceedings before federal and state taxing agencies.

Rich Smith - rsmith@jsslaw.com - 602.262.5972
Bill Clarke - wclarke@jsslaw.com - 602.262.5886
John Christian - jchristian@jsslaw.com - 602.262.5805
Jack Rudel - jrudel@jsslaw.com - 602.262.5951
Otto Shill - oshill@jsslaw.com - 602.262.5956
Paul Valentine - pvalentine@jsslaw.com - 602.262.5940