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Donald J. Trump will be sworn in as the 45th President of the United States at Noon on January 20, 2017 on the steps of the U.S. Capitol in Washington, D.C.
Whether you love it, hate it, or anything in between – it will become a reality soon. What does a Trump Presidency mean for your Estate Plan? In this article, I’ll give a very basic overview of the current estate tax system and then review what Trump has indicated his proposed estate tax reforms might be. Finally, I'll give some of my opinions on the subject.
Current Federal Estate Tax Rule Overview
Unified Federal Gift and Estate Tax Credit
The federal government has what is called a unified estate and gift tax credit of $5.49 million for 2017. That means that someone can give up to $5.49 million over their lifetime to their family and friends without having to pay a tax on that money. If someone dies in 2017 they can transfer up to $5.49 million to their heirs (less any money they have gifted over their lifetime) without paying any tax. There are a few exceptions to this rule. The more basic exceptions are as follows:
Spousal Exception: A person can give an unlimited amount of money to their spouse. For example – Bill Gates could give $1 billion to his wife during his lifetime or upon his death when he dies – and there is no estate tax consequence. That money is part of his wife’s estate now. When she dies, however – that money will be calculated as part of her estate – and some tax will be due. This example is a major simplification for illustration purposes.
$14,000 Annual Gift Tax Exclusion: You can currently give up to $14,000 a year to family, friends, etc, and that money does not count toward your $5.49 million lifetime Gift/Estate Tax credit. One strategy that people with large estates use is gifting up to $14,000 of assets to their children every year. This takes money out of the parents’ estate and any interest income that would accumulate in the future.
Federal Portability: Married couples can stack their Estate Tax credits through what is called “Portability”. In the Bill Gates example – he has $5.49 million in Estate Tax credit. When he dies, he can set up his estate so his Estate/Gift Tax Credit is transferred to his surviving spouse. When she dies, she can use his $5.49 million credit plus her own $5.49 million credit for a total of almost $11 million of Estate/Gift Tax Credit. That means married couples could have up to almost $11 million in assets and not have to pay any Federal Estate Tax upon their death or Gift Tax during their lifetime.
Capital Gains: Another tax that you should be aware of in terms of estate planning is the Capital Gains Tax. Here is an example of how Capital Gains Taxes work. Bill Gates buys a stock worth $10.00 in 1980 – but when he dies in 2020 – that stock is worth $100.00. The difference in value from the time he bought the property to the time he dies is $90.00 that is what is known as the “Capital Gain”. If Bill Gates sold that stock right before he died – he would have to pay a “Capital Gains Tax” on that $90 gain. However-- if Bill Gates does not sell that stock before he dies, then upon his death all the basis of his stock “steps up” to the present-day value of $100.00. Therefore, when his heirs inherit the stock they can turn around and sell the stock at the $100 basis value – and assuming the stock is worth $100 – there is no capital gain and therefore no capital gain tax.
For the assets that you own – you must be aware that you may have to pay a Capital Gains
Tax – if the value of that asset has appreciated from the time you bought it to the time you sell it; OR you may be subject to a gift tax if you give it to someone OR your estate may have to pay an estate tax if you die owning that asset. However, as previously noted -- you need to have over $5.49 million before you have to worry about paying any Estate or Gift Tax. There are other ways to avoid these taxes – such as through charitable giving – but that is a topic for another article.
Illinois Estate Tax
Illinois (and other states) have their own estate tax in addition to the Federal Government’s Estate Tax. Illinois does not have any Gift Tax. The Illinois Estate Tax Exclusion Amount is currently $4 million; therefore, if you have an estate that is more than $4 million – any value above that $4 million amount will be assets subject to an Illinois Estate Tax. Example: On an Illinois Estate worth $5 million, only $1 million will be subject to the Illinois Estate Tax. However, since it is not above the Federal Exclusion amount of $5.49 million, there will be no Federal Estate Tax owed.
What is Trump’s Proposed Plan for Estate Tax?
Trump’s tax proposals can be found on his campaign website by Clicking Here. As we have seen, what Trump has said on the campaign trial and what Trump says now – may change – but this is the best information we have right now.
1. Trump proposes to repeal the Federal “death tax” as we currently know it. With the current estate tax laws, if someone dies in 2017, that person’s estate would have to be worth more than $5.49 million at the time of their death before any federal estate tax would be incurred. Any value over $5.49 million would be taxed at a rate of 40%. Married couples can double the amount of assets they own for a total of almost $11 million through a tax rule known as “Portability”.
2. Trump’s tax plan would include repealing the Federal Gift and Estate Taxes entirely. However, Trump would use the Capital Gains Tax as a new form of “death tax.” Under Trump’s plan – when someone dies then the assets owned by the decedent would be deemed “sold” and Capital Gains would then be realized upon that event. However, under Trump’s plan, only Capital Gains in excess of $10 million would be taxable. Trump’s website states that small businesses and family farms would be exempt from paying Capital Gains – but no details are provided about this.
The Political Landscape for the Next Two Years:
What is the likelihood that Trump’s plan – or some form of it -- would get through Congress and signed into law? That is anyone’s guess. However, the political landscape for the Republicans does look favorable over the next 2 years. After the 2016 elections, the Republicans control the House, the Senate and the Presidency. The GOP has a 47-seat majority in the House and a four-seat advantage in the Senate. Looking forward to the 2018 elections, 10 Senate Democrats are up for re-election in states won by Mr. Trump. In total there are 25 Senate Democrats up for re-election in 2018, and only eight Republicans defending their seats. Are those Democrats in states won by Trump going to going to lean more Republican on votes to get re-elected? We shall see.
What does this all mean for you?
Essentially the Federal Estate and Gift Tax has been repealed for a few years now. With a $5.49 million estate tax credit in 2017 – only .2% of the U.S Population has to pay any type of “death tax” when they die. That is not 2% -- it is POINT 2%. When considering the spousal exemption, Portability, charitable deduction and other tax strategies, you would have to be a dim bulb to pay any Federal Estate Taxes right now.
It should be remembered that Trump’s plan does not affect the Illinois Estate Tax. Also, Illinois does not have “Portability” like the Federal Estate Tax laws do.
Conclusions:
1. Most Americans would not be affected if a form of Trump’s proposed estate tax plan passes and the current gift tax and estate tax is repealed and replaced with a “Capital Gains Tax” that has a $10 million exemption. Currently with “Portability” the estate tax exemption is $10.9 – roughly the same as Trump’s proposed $10 million Capital Gains Tax Exemption.
2. For Illinois residents, anyone approaching a $4 million net worth (this includes Life Insurance Policies, Retirement Accounts, and Equity in Your House) will need to think about planning for Estate Tax.
3. For the vast majority of Americans who don’t have estates approaching $4 million (Illinois exemption) let alone $5.49 million (individual Federal Exemption) or $10.9 million (Federal Portability Exemption Amount) the goals of estate planning would remain the same -- Avoid Probate; Make sure their Estate Plan is understood and their wished carried out (Legacy Protection); and to legitimately and legally protect assets from creditors in the future (Asset Protection). Estate tax planning is not on the radar.
4. For those Americans with larger estates, if a form of Trump’s plan passes -- we would need to think about Estate Tax planning terms of avoiding Capital Gains and not the traditional Estate Tax as we now understand it.
This article is a service of Attorney Chad A. Ritchie and the Ritchie Law Office, Ltd.
Click Here or call (309) 662-7000 to learn more about Ritchie Law Office, Ltd. and our Estate Planning process, which starts with an initial consultation called our “Ritchie Legacy Planning Session”.
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