Failure to Plan Now Could Put Your Client’s Estate in Jeopardy

Recently, the Trump administration announced plans to pursue their campaign promise of a broad tax reform package which may include repealing or replacing the estate tax. While no details have been released as to how this might be implemented, it could take many forms. Historically, the estate tax and the step-up in basis at death have been concurrently eliminated, so while taxes may not be collected as estate tax, beneficiaries could still be subject to capital gains tax on inherited assets upon death as well as taxes imposed by some states.

Although high net worth clients may believe the estate tax is dead, they still need to be funding for it as well as other tax burdens, and life insurance, specifically SUL, is a great way to accomplish this. Even if a repeal of the estate tax were to occur, it would likely be reinstituted. In fact, there has only been one year without estate taxes in our lifetimes, so failure to plan now could put your client’s estate in jeopardy in years to come.

To learn more see the Investment News article below.

Trump tax proposal leaves advisers in the dark on estate tax repeal

Ideas floated in the past include imposing a Canadian-style capital-gains tax at death in place of a federal estate tax, but the president hasn’t offered additional details

Apr 27, 2017 @ 2:16 pm

By Greg Iacurci

The broad-brush tax proposal released Wednesday by President Donald J. Trump repeated his campaign pledge to repeal the estate tax, but failed to provide financial advisers with any additional detail regarding its form.

That leaves advisers in estate-tax limbo, which they’ve largely been in ever since the prospect of a broad tax-reform package gained steam following November’s presidential election.

“He was never clear to begin with, and he certainly didn’t get any clearer,” said Charlie Douglas, director of wealth planning at Cedar Rowe Partners. “I think people should just proceed with estate planning rather than waiting to see how it all irons out.”

The estate tax is a federal 40% tax levied on estates exceeding $5.49 million for individuals and roughly $11 million for married couples. Estates receive a step-up in tax basis at death, which dilutes the impact of paying capital-gains tax on inherited assets.

The federal tax raised $17.1 billion for the government in 2015. Many states also levy their own taxes, the asset thresholds and percentages of which vary.

A wealthy, elderly client of David Edwards, president of Heron Financial Group, passed away in January this year, and her estate is on the hook for a few millions dollars in tax. If the federal estate tax is repealed this year, that bill could disappear.

“I told them so far, ‘Don’t count on it,'” Mr. Edwards said.

Many observers expect an estate-tax repeal as part of any tax-reform package — which in and of itself isn’t guaranteed, due to Democratic opposition and potential opposition from hardline conservatives who are loath to balloon the federal deficit.

Mr. Trump is, among other things, calling for a reduction in the corporate tax rate to 15%, a lowering of the top marginal income tax rate to 35%, and doing away with the alternative minimum tax.

An estate-tax repeal could take a variety of forms that would have different planning implications.

For instance, one concept floated by Mr. Trump in the past is scrapping the estate tax, but imposing a Canadian-style system that instead assesses a capital-gains tax at death.

The lost tax revenue of an estate-tax repeal would be partially offset by limiting the basis step-up at death, up to the first $10 million of appreciated property, said Richard Behrendt, director of estate planning at Annex Wealth Management.

For example, in the past, inheritors of a business created with $2 million of capital and worth $50 million upon the owner’s death wouldn’t pay capital gains tax if they turned around and immediately sold the business. That’s because tax basis would have “stepped up” to $50 million, eliminating the capital gain.

But, under a Trump plan, beneficiaries could wind up paying capital gains on an asset valued over $10 million at death, which ends up being a better deal for wealthy clients, Mr. Behrendt said.

“You’re basically trading a 40% tax rate for a 20% tax rate. Every family in the country will say, ‘Sign me up for that,'” Mr. Behrendt said.

However, details have been “vague” and there wasn’t any additional detail in yesterday’s announcement, he added.

Observers note, though, that the estate tax would likely reappear in 10 years’ time, even if it is repealed.

This is because Republicans would need several Democrats to support tax legislation in order to achieve a supermajority — 60 votes — and avoid a filibuster, something observers believe is unlikely due to philosophical disparity between both parties regarding taxes.

“The Democrats are dead set against it. It’s dead on arrival as far as they’re concerned,” Mr. Edwards said.

Republicans can bypass this numerical conundrum by passing tax legislation through budget reconciliation, a maneuver that allows them to pass a bill with a simple majority in the Senate. However, current rules dictate that any measure passed under reconciliation must “sunset” after a decade if it would increase the budget deficit outside of a 10-year window.

This is how President George W. Bush passed his tax-cut package in the early 2000s.

“That could happen again,” said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. “They are today in a deficit position, after the first 10 years.”

“For estate planning purposes, you’d want to think through trying to get your estate plan to line up with the return of the estate tax in year 11,” he added. “The best plan is to die in those 10 years.”

About Stephanie

Stephanie is the 3rd generation of Shaws to work for Shaw American. After graduating from Indiana University in 2011, Stephanie quickly found that life insurance was her true calling.

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