Flexibility is key to your success as an estate-planning attorney. Estate planning is in a constant state of flux. That’s especially true today as President Donald Trump’s administration plans to alter the American tax code.
When the Trump administration releases its plans, the uproar from both sides of the aisle tends to overshadow the substance of the proposals. Such was the case with Trump’s tax plan. The page-long document is short on specific details and differs slightly from the campaign tax plan, but it signals business friendly tax policies that would cut taxes by trillions of dollars. Whether or not Trump’s tax plan becomes policy is another matter, but it’s clear that changes are coming for American taxation.
What can estate-planning attorneys do in the meantime? Smart planners aren’t taking a “wait and see” approach to the new tax plan. Instead, they’re remaining flexible and taking a proactive approach to estate planning that accounts for legislative changes in the immediate and long-term future.
Trump’s tax plan could affect your clients significantly, especially business owners.
The administration’s tax reforms include:
- Reducing the number of tax brackets from seven to three (10 percent, 25 percent and 35 percent)
- A flat 15 percent corporate tax rate
- A territorial tax system (businesses only pay tax on income earned in the U.S.)
- Elimination of the estate tax
The American Taxpayer Relief Act effectively eliminated the estate tax for the vast majority of the population, so most of your clients won’t be impacted by a complete elimination of the estate tax. However, many will be affected by changes in income and business taxes. The flat corporate tax rate proposed by Trump will only affect large businesses, but small-business owners will still be taxed at the 15 percent individual tax rate. This could level the playing field between large corporations and small businesses and reduce the tax burden for many of your clients who own and operate small businesses.
Planning for Tax Reform
Existing high-net-worth clients for whom you’ve created a trust to avoid federal estate-tax liability might benefit from an adjusted trust if the estate tax is repealed. A new version of the trust might aim to avoid as much state tax as possible, particularly in states that impose a high state-level estate tax.
A 10-year “sunset” on the estate tax is another possibility. Since a majority of Senate Democrats are against complete elimination of the estate tax, a 60-vote supermajority is unlikely. As an alternative, Republicans can pass tax legislation through budget reconciliation, much in the same way President George W. Bush passed his administration’s tax cuts during his first term. This strategy requires any legislation to expire after a decade. In the event of a “sunset,” estate-planning attorneys should consider how to line up their clients' estate plans with the return of an estate tax after 10 years.
Regardless of how tax reform plays out, universally beneficial strategies, like revocable living trusts with pour-over wills and smart business planning to limit liability, will help your clients plan for the future and protect their hard-earned assets. Rushing to make changes is unnecessary, but remaining informed about pending or proposed legislative changes can help you move quickly to evaluate the options and adapt your clients' plans, if necessary.
Your clients will likely have questions amid uncertainty about what’s to come from Washington. You can help by remaining informed about changes and communicating those changes to your clients. Establish yourself as the go-to resource for questions about the latest legislation, and be ready to act on your clients’ behalf.