The recently concluded 51st Annual Heckerling Institute on Estate Planning in Orlando, Fla. posed a myriad of questions and provided very few answers. We’re at a crossroads as a result of the recent presidential election. In short, all of the estate planning challenges that we expected to confront prior to Nov. 8, 2016—such as navigating the proposed regulations under Internal Revenue Code Section 2704 that threatened to curtail discounts for both lack of control and lack of marketability in closely-held family entities—have been supplanted by a new paradigm of uncertainty. This uncertainty applies to both the future of the estate, gift and generation-skipping transfer (GST) tax system, and what any successor to it might look like. Including the step-up in basis of property acquired from a decedent and a possible capital gains tax on death in lieu of the estate tax. How does one plan in the wake of such massive uncertainty? What can we reasonably expect to occur?
The Possibility of Federal Estate Tax Repeal
The elephant in the room at Heckerling was the possibility of federal estate tax repeal. Is it likely to occur or is it unlikely? If estate tax repeal were to occur, would it be accompanied by a repeal of both the gift tax and the GST tax? Moreover, would it be permanent or only temporarily subject to “sunset” as was the case with the temporary repeal of the federal estate tax that occurred in 2010? Also, if the estate tax were repealed, what would happen to the basis of assets? Would there be a modified carryover basis regime (as there was with the 2010 estate tax repeal), or would there be a capital gains tax on death for appreciation above some level (such as $10 million, which was suggested on President Trump’s campaign website)?
The Republicans, prior to the November elections, proposed significant changes to the IRC, including dropping the top income tax rate for individuals to 33 percent, eliminating the alternative minimum tax for individuals, limiting itemized deductions to home mortgage interest and charitable donations, as well as repealing the estate and GST taxes. There was no mention made, however, of the gift tax.
The following plan concerning the “death tax” appeared on President Trump’s campaign website.
The Trump Plan will repeal the death tax, but capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.
This raises the following questions, among others:
- Would there be capital gains tax at death in lieu of an estate tax subject to a $10 million exemption?
- Would the gift tax be repealed as well?
- What about the GST tax?
- Would there be permanent repeal (which would likely require 60 votes in the Senate) versus temporary repeal subject to sunset?
- Would there be a step-up in basis at death versus carryover basis?
- Would there be a denial of charitable deductions for bequests to private foundations?1
No Consensus Concerning Repeal
The only consensus to emerge at Heckerling is that no one knows what will happen. According to a “straw poll” of the Heckerling advisory committee that was reported by Dennis I. Belcher during the Recent Developments Panel, approximately one-third of those polled believe that there is a greater than 50 percent likelihood that estate tax repeal will occur, one-third believe that there is a 50 percent likelihood of estate tax repeal, and one-third believe that there is a less than 50 percent likelihood of estate tax repeal.
Ronald D. Aucutt articulated the view at Heckerling that estate tax repeal is unlikely to occur because the Republican leadership, when push comes to shove, will choose to expend its political capital elsewhere. According to Aucutt, factors influencing this potential outcome of no estate tax repeal include the huge budget deficits, the trickiness of obtaining repeal in the context of the budget reconciliation process, the enormous infrastructure spending that President Trump favors and the problematic optics of pushing for an estate tax repeal that would tremendously benefit the families of billionaires such as President Trump and certain of his cabinet choices. In short, estate tax repeal may not be high enough in the Republicans’ pecking order to warrant treating it as a primary, secondary or even tertiary priority. Which, instead, could position it as a sacrificial lamb to serve as a bargaining chip in exchange for higher priorities—such as the repeal of the Affordable Care Act, business tax reductions and individual income tax reductions.
Planning in the Face of Uncertainty
So, how does one plan in the face of such massive uncertainty? The consensus at Heckerling was that the approach should be twofold:
- To provide for maximum flexibility. This could include the use of a “Clayton qualified terminable interest property (QTIP) trust,” which would allow an independent trustee to cause a disposition in trust for the benefit of a surviving spouse, for which a QTIP election to qualify for the estate tax marital deduction isn’t made, to “flip over” in favor of a family trust. This could also be accomplished through an estate plan that relies on the surviving spouse’s cascading disclaimers to produce the optimal result under the circumstances.
- To avoid paying any gift tax. Estate planning techniques that are designed to minimize gift tax exposure include Grantor Retained Annuity Trusts (GRAT) and sales to Intentionally Defective Grantor Trusts (IDGTs). To further reduce gift tax risk in conjunction with sales or gifts to IDGTs, John W. Porter suggested that defined value formula clauses could be employed as an additional line of defense in the event the IRS challenges the taxpayer’s appraisals and valuations reported on the gift tax return.
1 President Trump’s proposals would also limit itemized deductions to home mortgage deductions and charitable donations. However, unlike the Republican Blueprint proposal, President Trump’s proposal would place an annual cap on itemized deductions of $100,000 for a single taxpayer and $200,000 for a married couple that files a joint return. While the annual cap may have little impact on charitable giving by most taxpayers, it would likely reduce the incentive for many high-income taxpayers to make substantial charitable gifts.
Kevin Matz is a Partner at the law firm of Stroock & Stroock & Lavan LLP in New York City