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Estate Planning in 2017 and Beyond

Kristin Ashman, Trust Regional Team Lead, First Republic Trust Company
February 17, 2017

Proposed federal tax reforms could significantly change how individuals and couples plan to leave their assets to charity or the next generations. Below are important considerations for drafting a flexible estate plan.

Let’s start with the basics: For the 2017 tax year, the combined federal estate and gift-tax exemption is $5.49 million per individual and $10.98 million for a married couple. Taxable estates greater than the exemption amount are currently taxed at 40 percent. President Donald Trump has proposed a full repeal, which would mean that large estates would no longer be subject to any federal estate tax.

Given strong support from the president and a Republican-controlled Congress, a repeal of the estate tax certainly seems likely; even so, it is not yet clear when it might happen. Congress has so far focused its efforts in 2017 on health care reform, though comprehensive federal tax reform remains a top priority.

New taxes possible
Even if the estate tax is repealed, lawmakers could replace it with other types of taxes such as a capital gains tax on estates over $10 million, as President Trump proposed. What’s more, many estates may still owe a separate estate or inheritance tax at the state level, depending on where the decedent lived or owned property.

The current proposals lack specificity and it is difficult to predict exactly which will be implemented and whether estate taxes will be altered or eliminated. As such, there are many interpretations of the impact of the current proposals. For example, the president has not made proposals to change the federal gift tax or generation-skipping transfer tax (GSTT), which is imposed on gifts and bequests above the exemption amount to beneficiaries – usually grandchildren – more than 37-and-a-half years younger than the donor. If the gift tax or GSTT are not repealed with the estate tax, it could change the strategies families implement to transfer assets to the next generation.

It is also important to keep in mind that any change or elimination of estate tax, gift tax or the GSTT is not necessarily permanent. The exemption amount and tax rate have varied over time and it is likely they will change again in the future.

Tax planning is one of the many reasons why it is a good idea to implement an estate plan. Confidentiality, avoiding probate and managing your assets during your lifetime and after you pass away are other reasons. You should also review your estate plan every few years, when there is a change in family dynamics or a significant life event, or to make sure that your plan is up-to-date with the current law.

Reduced charitable deductions?
Other proposed tax changes could affect how families plan their charitable gifts. President Trump said he would cap itemized deductions, which include charitable gifts, home mortgage interest and state income taxes, at $100,000 annually for individuals and $200,000 for married couples. The president has also proposed disallowing tax deductions when appreciated assets are gifted to private foundations.

If these proposals are implemented, they could drastically reduce the tax benefits of large charitable gifts and reduce the impact of charitable giving. As a result, affluent individuals may have to plan more strategically for how and when they give.

How trusts could be affected
Even if the estate tax is repealed, trusts will remain an important aspect of many estate plans.

As noted above, trusts offer several non-tax benefits, including confidentiality, the ability to avoid probate and the associated administrative and legal expenses, and standby financial management in the event of physical or mental incapacity. Trusts serve to carry out the grantor’s wishes after death and can ensure the proper distribution of assets to the intended beneficiaries. Trusts can also provide asset protection in the event of a divorce, lawsuit or creditor claim. Furthermore, planning with trusts still benefits those who live in states that impose a state estate tax.

Planning around uncertainty
It is important not to make changes based on proposals. So what can individuals and families do, given all the uncertainty around the future of transfer taxes?

Regardless of your intent, a well-drafted and flexible estate plan is needed in order to account for possible changes in the tax law – in 2017 and beyond. We recommend reviewing your estate plans with your legal, tax and financial advisors to determine if revisions are necessary.

The strategies mentioned in this article will often have tax and legal consequences. Therefore, it is important to bear in mind that First Republic does not provide tax or legal advice. This information is provided to you “as-is,” does not constitute legal advice, and is governed by our Terms and Conditions of Use. We are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Clients’ tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.

The information and opinions in this article are presented as-is and may not be suitable for all readers.  Please obtain appropriate advice for your particular situation.  

© 2017 First Republic Trust Company