As the Trump Administration nears the end of its first full year in office, Republicans in the White House, the House and the Senate are gearing up for a major overhaul of the tax system.
The new plan envisions dramatic cuts in corporate tax rates (to 25%), as well as simpler individual tax code with fewer brackets, a larger exemption and few individual tax deductions. In one change already provoking howls of protest on both coasts, state and local income taxes would no longer be deductible. In another more welcome alteration, the alternative minimum tax would disappear. A vaguely worded intention to allow small businesses to benefit from lower “pass-through” rates (which top out at 25%) seems likely to set the most agile minds in
accounting to work on tax-reducing strategies. And in good news for the truly wealthy — and the advisors who serve them — estate tax and generation-skipping tax will be phased out.
Yet while the broad outlines have been sketched, the details are still scanty. Making drastic changes now would be foolish says Nick Bertha, managing director and director of wealth and trust planning at New York City-based Fieldpoint Private. “I wouldn’t want to go out on a limb and do anything precipitous or radical until I knew what the rules were,” he says. “You can end up shooting yourself in the foot pretty easily by making some big and irreversible mistakes.”
The most significant change, from a wealth planning perspective, is the complete elimination of the estate tax. If that part of reform were to be enacted what, exactly, would become of estate planning.
Bill Sweet, an advisor at NYC-based Ritholtz Wealth Management believes that wealthy families would still require planning services. “To begin, estate taxes will likely remain in place at most states that impose an estate tax at the state level. Currently, 20 do. Given that most state exemptions are at $1 - $2 million, estate tax planning for the purposes of minimizing estate and inheritance taxes will likely be important for wealthy investors even if estate taxes are repealed at the federal level,” he says. (Though, to be fair, Bertha believes that the repeal of federal estate tax might cause some states to get rid of their own estate taxes.)
And Bertha cautions that even if the GOP gets rid of the estate tax in 2018 (or 2017, or whenever they manage to pass legislation), there’s no guarantee that the next Democratic-majority government won’t start it right back up again. So the question becomes, what do you do with a window of time, maybe one or two years, maybe more, when there is no estate tax?
So while individuals with dynasty trusts might have the option to decant these trusts into other structures to loosen restrictions on asset use, they also might consider protecting even more assets.
“One thing we’re actually talking to people about is let’s say that there is no estate tax next year and no gift tax which is a key component of that, and you were visionary enough to see that this is not going to last. You could put a lot of assets into a dynasty trust,” says Bertha. “There’s no tax dimension going in because there’s no gift tax and no estate tax. And there’s no limit on it because there’s no estate tax. And when the sheriff comes back into town, you really have protected these assets in perpetuity.”
The proposed tax reform affects many other areas of financial and wealth planning. For an in-depth discussion of its implications, download Premier Trust’s free white paper “Taxes in Flux: What You Need to Know About Evolving Trump Tax Reform.”
