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Trump’s Proposals and Vulnerable Clients

Leading attorneys in elder law and special-needs planning analyze some current proposals.

Since the 2016 U.S. election, civil discourse and reasoned debates have largely fallen victim to passions, vitriol and unbending partisanship.

The level of speculation and, frankly, fear emanating from so many journalists, politicians and other opinion makers is worrying. There’s an extraordinary need for objectivity as new proposals emerge from the administration and from Congress, especially concerning older Americans and Americans with disabilities.  

With that in mind, let’s examine actual proposals and legislation that impact or could impact elderly and special-needs clients.

Trump’s Tax Plan

Tax reform is one of the administration’s priorities. If enacted, proposed changes will impact older Americans and individuals with disabilities as to income and estate taxation.  

On April 26, 2017, Treasury Secretary Steven Mnuchin and Gary D. Cohn, the director of the president’s National Economic Council, provided a skeletal outline of the Trump administration’s guidelines for tax reform. This plan was unveiled in a single-page statement filled with bullet points.

The goals, simply stated, are as follows:

• Tax relief for middle-class Americans: To achieve the American dream, let people keep more money in their pockets and increase after-tax wages.

• Simplify the Tax Code: To reduce the headaches Americans face in preparing their taxes and let everyone keep more of their money.

• Grow the American economy: By discouraging corporate inversions, adding a huge number of new jobs and making America globally competitive again.

• Don’t add to our debt and deficit: Which are already too large.

Here’s a brief summary of the proposed changes, as we understand them. 

Income taxation. A number of income tax proposals have been proffered. For example, individual income tax rates would be compressed into three brackets—10 percent, 25 percent and 35 percent. Compare these rates with the seven rates that are currently in effect and that include 39.6 percent as the highest level of taxation. Details on the income brackets that would trigger these rates aren’t yet available.  

The standard deduction will double to $24,000 (for married taxpayers filing jointly), while certain itemized deductions (including state and local taxes) would no longer be allowed. This would simplify millions of taxpayers’ returns. It would logically benefit low-income taxpayers.  

The proposed elimination of some itemized deductions, including the deduction of mortgage interest, could decrease potential homeowners’ incentives to purchase a residence or to sell and then purchase a more valuable residence.

It would repeal the alternative minimum tax (AMT), the net investment income (NII) tax and most individual credits. For high-income seniors, repeal of the AMT could significantly reduce income taxes while also simplifying the preparation of individual tax returns. Many high-income seniors would likely enjoy reduced tax on certain investment income if the 3.8 percent NII tax were eliminated.

It would also provide tax relief for families with child- and dependent-care expenses. This could give some tax relief to adult children who are caregivers for their parents or a disabled sibling. It could also be helpful for families with special-needs children.

Estate taxation. The plan would repeal the federal estate tax. This issue isn’t relevant to the vast majority of older Americans because the current level of estate- and gift-tax protection is $5.49 million, or $10.98 million for a married couple. Current law allows for annual adjustments in the level of estate-tax protection.

For those older Americans who have taxable estates, the future of the estate tax is uncertain. Discussion among congressional leaders and critics focuses more on income and corporate tax rates, border adjustment, and the tax implications of the “repeal and replace” effort regarding the ACA.

It's inevitable, however, that income and capital-gains planning would be more important if the estate tax were repealed. Indeed, it’s possible that all assets in an individual’s estate wouldn't enjoy a step-up in basis at the time of death. The president previously proposed a step-up in basis only for the first $10 million of estate assets. Assets above that level would have a carryover basis, which could result in additional taxes on the sale of appreciated assets.

Business taxation. For seniors who own businesses, Trump’s plan would reduce both the corporate and small-business tax rate to 15 percent. 

Small businesses (partnerships, S corporations and sole proprietorships) that pass their income through their owners will effectively also be taxed at 15 percent. Currently, this income can be taxed at a maximum rate of 39.6 percent on the owners’ tax returns. While ordinary income, such as wages and interest income, would be taxed at a maximum rate of 35 percent, business income tax will be capped at 15 percent.

The Trump-Ryan Plan for Medicaid

Though tax breaks may look great, there is another side to that coin.

The House of Representatives passed the revised American Health Care Act (AHCA) on May 4. While the Senate says it’s crafting its own bill from scratch, we can begin moving from conjecture to reality, though much still remains uncertain. AHCA is projected to cut Medicaid expenditures by $839 billion over the next 10 years; Trump’s recently released budget proposal would cut another $610 billion. 

Per-capita rather than block grants (maybe). Speaker of the House Paul Ryan has long been a proponent of block grants for Medicaid in place of the current system, under which the federal government simply reimburses states for a percentage of their spending (with the percentage varying by state), no matter the cost. Under the current system, the federal government sets out the rules on who may be covered and what services Medicaid will pay for. Within those rules, each state runs its own Medicaid program. 

Currently there are two block grant proposals. One would simply give each state a set amount of money to spend on its Medicaid program as it sees fit. The other would give them a fixed amount per Medicaid beneficiary, with different amounts for beneficiaries according to the following five categories (with some exceptions): elderly, blind and disabled, children, expansion adults (under the ACA Medicaid expansion), and other adults.

Under either plan, the Congressional Budget Office (CBO) projects, “With less federal reimbursement for Medicaid, states would need to decide whether to commit more of their own resources to finance the program at current-law levels or whether to reduce spending by cutting payments to health care providers and health plans, eliminating optional services, restricting eligibility for enrollment or (to the extent feasible) arriving at more efficient methods for delivering services.”

Likely effects. Undoubtedly, the bill will go through many changes before enactment, so we can’t know the ultimate effects. But, here are a few possibilities based on the initial proposal: 

• No changes until 2020. 

• More strain on state budgets after 2020 as they receive less federal funding. 

• Lower enrollment in insurance and Medicaid by Americans between ages 50 and 64 due to lower health insurance subsidies, repeal of limits on age-based insurance premiums, and a rollback of Medicaid expansion.  

• A loss of a portion of federal funding for the CFC program, which could lead states to eliminate it or reduce enrollment, perhaps grandfathering those already in the program. 

Whatever happens, these changes will be quite disruptive to health care systems, providers and beneficiaries throughout the nation. Sara Rosenbaum, chair of the Department of Health Policy at the George Washington University School of Public Health in Washington, D.C., wrote the following on the Health Affairs Blog: 

“States have built their programs and designed their complex health care delivery systems for the poor over a half-century, entirely depending on this federal/state funding arrangement. Under the bill, they either would have to accept the terms of a seriously diminished financial deal or give up federal funds entirely.”

Further, by restricting federal reimbursement to the number of beneficiaries rather than actual costs, they’ll only adjust partially to unanticipated needs that inevitably will arise, such as the aftermath of Katrina or, more recently, responding to the Zika virus. The states will have to deal with increased costs on their own while they seek congressional approval of federal cost sharing. And those most in need of these services will likely feel the monetary pinch.

 

This is an adapted version of the authors' original article in the July 2017 issue of 'Trusts & Estates.'

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