(November 21, 2016) The recent election could mean significant changes in estate and gift tax laws. We believe recent regulatory efforts to abolish valuation discounts will effectively be suspended, and the federal estate/gift tax may soon be repealed.
Under current federal estate and gift tax laws, a person is typically taxed at about a 40% rate on the aggregate value of gratuitous transfers made during life and upon death, in excess of an exemption of $5.45 million per person or $10.9 million for a married couple (subject to annual inflation adjustments).
Individuals whose estates exceed the estate/gift tax exemptions utilize valuation discounts to reduce their taxable gifts/estates. Such discounts can reduce the reportable value of assets subject to the estate or gift tax by 30-40% (typically). Heirs/recipients eventually receive the full fair market value but the discounted portion essentially bypasses the estate and gift tax system. This has made discounts a valuable estate planning tool.
Recently, Treasury Regulations were introduced in “proposed” form that would largely abolish valuation discounts (once the regulations become final). A required procedure involving public hearings and opportunities for feedback is underway, but the regulations’ effective date is impossible to peg with any certainty. Most commentators felt that date would have fallen somewhere in the first or second quarter of 2017.
The proposed discount regulations have received significant commentary and criticism within estate planning circles. In the political arena, the discussion has fallen largely along party lines, with Democrats generally favoring them, and the Republicans generally disfavoring them. Now that the November 8 election has shifted the balance of power, we expect the discount regulations to be withdrawn.
The November 8 election may effectively render the discount regulations moot in a couple of different ways. First and foremost, President-elect Trump has promised a review of all pending and recently finalized administrative regulations, with an eye toward the reduction of same. As noted, the discount regulations address a politically-charged issue, making them a strong candidate for suspension if not outright withdrawal. Second, the discount regulations could be rendered moot by estate tax repeal.
Candidate Trump’s tax plan included estate and gift tax repeal as one component. We do not yet know how strongly the new administration will push for estate and gift tax repeal or how such a proposal would be received by Congress, but Republicans have historically supported it and tend to propose it given any sort of electoral/legislative advantage. But Republicans may still lack the required votes for outright repeal
Outright repeal would probably require a filibuster-proof majority in the Senate (i.e., 60 votes) in order to pass as a stand-alone measure. The party alignment in the Senate appears that it will be either 52-48 or 51-49 in the Republicans’ favor with possibly as many as 6 Democratic cross-overs based on past votes. The chances for repeal would probably be improved as part of a larger package of tax proposals, subject to typical give-and-take of budget negotiations (which could water down the “repeal”). On this front, candidate Trump made clear while campaigning that he would be willing to compromise by “trading” estate tax repeal for a capital gains tax on death (on large estates only).
We are certainly keeping an eye on these matters. Anything could happen, but we do expect a strong push for outright repeal of the federal estate and gift tax, with the outcome likely falling between the political extremes – with the estate/gift tax being in some sense “repealed” but in exchange for a capital gains tax upon death (in some form). We also expect the discount regulations to be suspended and at some point withdrawn.
We suggest that individuals considering significant transfers of wealth reconsider their plans in light of the election, and its impact on the proposed discount regulations and the prospects for estate and gift tax repeal. We generally suggest that pending discount-dependent transactions be completed to avoid problems if the regulations are finalized, but longer-range planning take into account the chances for estate/gift tax repeal going forward.More Publications