Estate Tax Repeal Does Not Mean Estate Planning is No Longer Important
Repeal of the federal estate tax is now more likely than at any other time in its nearly 100-year history. Not coincidentally, people have asked me whether “estate planning” is still necessary in an “estate tax-free” world. For several significant reasons, traditional estate planning, and even tax-efficient planning, will remain important for most clients.
Plan for several scenarios
If the estate tax is repealed, the effective repeal date could be delayed, or phased out over several years, due to current budget concerns. In addition, if Republicans do not have sufficient votes for “permanent” repeal, they may have to resort to “reconciliation”, which could effectively limit repeal to 10 years. There is also no guarantee that repeal would not be reversed by a future Congress after its net economic effect is calculated. So, estate planning to account for various repeal possibilities remains important.
If the estate tax is repealed, and the associated “basis step-up” is repealed with it1, heirs and estate beneficiaries may be required to inherit estate assets with a “carryover basis” equal to the decedent’s basis, or an alternative suggested by the Trump administration would have heirs and estate beneficiaries inherit estate assets with a stepped-up basis after appreciation during the decedent’s lifetime is subjected to capital gains taxation. Either way, a byproduct of estate tax repeal could be basis concerns for which tax-efficient planning options would remain important.
Some taxes not affected by proposed reforms
There is also no current proposal to repeal the existing federal gift tax or generation-skipping transfer (GST) tax, so tax-efficient gift and/or multi-generational planning will remain important.
Charitable entities are concerned that estate tax repeal will remove an important incentive for charitable bequests and other charitable transfers. Those concerns may be valid, but many people will want to keep or continue their charitable gifts regardless of any tax benefit, so estate planning that incorporates charitable planning will remain important.
Orderly distribution of assets requires careful planning
Lastly, while estate planning has often included a tax-reduction motivation, that has rarely been the primary motivation. More significantly, estate planning will remain important to providing an orderly distribution of assets upon death, structuring the continued support of a surviving spouse, children, and grandchildren after death, designating a chosen executor to manage the estate, avoiding court-supervised probate administration, and implementing diminished-capacity planning.
1Currently, the basis of inherited assets is generally adjusted to their date-of-death values, so appreciation during the decedent’s lifetime typically escapes capital gains taxation upon a later sale.