The election of Donald Trump and Republican majorities in U.S. Congress make the future of the federal transfer tax system (gift, estate and generation-skipping transfer (GST) taxes) uncertain. President-elect Trump and congressional Republicans may seek to repeal or significantly modify those taxes. They have also called for significant income tax reform. These changes would impact personal and family estate planning as well as family offices, businesses and investment companies.
The plans advanced by President-elect Trump and House Republicans contain limited information regarding possible changes to federal transfer, income and capital gains taxes, but their plans suggest major changes to these taxes may be coming.
President-elect Trump's plan would repeal the estate tax. His plan does not address gift or GST taxes, but it is likely that those taxes would also be repealed or significantly modified. The current Trump plan appears to tax capital gains in excess of $10 million at death and would prohibit the contribution of appreciated assets into a private charity established by a decedent or a decedent’s relatives to avoid such tax.
House Republicans have proposed a tax plan that would repeal the estate and GST tax. The House plan does not address gift taxes, but they may be repealed or significantly modified as well. The House plan does not address whether the basis adjustment would be repealed or whether capital gains would be taxed at death. The House passed a bill in 2015, which was not adopted by the Senate, to repeal the estate and GST tax, but it retained basis adjustment at death and the gift tax. The gift tax was retained to prevent the transfer of assets to a family member with a lower income tax bracket.
While an effort to repeal or modify these taxes might face a filibuster in the Senate, the Republican majority might overcome a filibuster through various procedural maneuvers.
Regardless of changes to federal taxes, such changes are not likely to directly affect state estate, income or property taxes.
New Developments Regarding Proposed Valuation Discount Regulations Under IRC Section 2704
The IRS recently released proposed regulations under IRC Section 2704 that are designed to limit valuation discounts for transfers of closely held business interests to related parties. The response to the regulations was overwhelming; more than 30,000 written comments were submitted before the November 1, 2016 deadline. IRS officials have publicly stated that they are continuing to work toward adopting the regulations but that passage of final regulations is unlikely before Trump takes office. These developments suggest that the future of the regulations is uncertain and that there will be more time to monitor their progress.
Planning Considerations
In light of these developments, we emphasize the importance of flexibility in your planning. We recommend continued planning that prevents or minimizes the payment of federal gift tax because the timing and details of the potential changes to the estate, gift and GST taxes are not certain. We will continue to monitor the situation and send future updates.
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