One of Donald J. Trump’s campaign promises was a reform of the Internal Revenue Code. With respect to the Estate Tax, what does that mean? According to the website www.donaldjtrump.com, President-Elect Trump’s 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.”
Not much detail here but it sounds as though there will be no separate estate tax and I would therefore presume that capital gain assets in excess of $10 million will not be entitled to a stepped up in basis at death and will be subject to capital gains income tax when the capital gain assets are sold. The Trump Plan is to retain the current capital gains tax rate of 20%. Thus, for substantial estates, there will be a reduction in overall taxes in relation to the estate tax and income taxes.
Does this mean, under a Trump Administration, estate planning is no longer needed? The resounding answer is NO! Estate planning during a Trump Administration remains extremely important.
Estate planning is the legal process of arranging your affairs during your lifetime by putting in place the control documents to manage your assets during your lifetime and how those assets will be disposed of upon your passing. With less than 2% of all estates being subject to the Estate Tax with the current exemption amounts, planning for estate taxes does not come into play for the vast majority of our population. Thus, the most important part of estate planning will remain unchanged under a Trump Administration.
The “control” documents to manage your estate typically includes a Will, Revocable Living Trust (“Trust”), Durable Power of Attorney, and Advanced Health Care Directive.
The Durable Power of Attorney, generally speaking, provides your agent the power or authority to manage your assets while you are alive.
The Advanced Health Care Directive, generally speaking, provides your instructions to your agent with respect to your health care when you are no longer able to communicate those instructions to your health care provider.
The Will (or Pour Over Will) when used in conjunction with a Trust will dispose of very little of your estate or provide little instruction as the goal will be to have your assets disposed of pursuant to the terms of your Trust. Your Trust will provide the instructions with respect to the disposition of your estate. If your estate is structured properly, it will be a private affair and will not be subject to the prying eyes of the public through a probate process.
In setting up your Trust, you, as Settlor or Grantor, will transfer your assets to a Trustee who will manage the assets pursuant to a legal agreement. Typically, the Settlor is the initial Trustee so you retain control of your assets while you are alive. Upon the Settlor’s incapacity or death, a successor trustee will be appointed to manage your assets. The basics sound simple enough. However, the devil is in the details.
Every estate plan is different and there is no single structure that works for everyone. The effective estate plan will analyze a person’s desires with respect to the disposition of their assets upon death, analyze their assets, and put in place the proper documents to implement the person’s instructions upon their passing.
Although there is not a single estate planning structure that works for everyone, there are customary fact pattern situations and common issues that arise in a majority of estates. Some of these issues can include:
1. In a husband and wife estate plan upon the first death, will all the assets be left to the unfettered control and ultimate disposition by the second to die spouse?
2. In a husband and wife estate plan with multiple children, will all the assets ultimately be left equally to all the children pro rata, i.e., in a two child situation, will each child get 50% in all the assets? If there is an operating business, what is to happen with that business? Will it be sold? If one of the children works in the business, will they have to buy out their siblings and if so, how do you determine that buy out value?
3. In a husband and wife estate plan with multiple children, will all the children be successor co-trustees upon the second to die spouse?
In a typical estate plan, there are many issues that need to be discussed and addressed. Estate tax, although it can be substantial where applicable, is just one issue that needs to be addressed. Most likely, if an estate is subject to estate tax, there are many more important issues than tax that need to be analyzed and addressed. A proper estate plan will address, as best as possible, all the likely issues that will arise.
Accordingly, even if the Trump Plan will repeal the death tax, estate planning remains as important as ever.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or jwh@caloneandharrel.com