President-elect Trump and the House Republicans are preparing to initiate the most significant and substantial reform of the federal tax laws since the 1986 tax reform act.  

Proposals include cutting income and corporate taxes and repealing the estate tax.  A list of these proposals may be found in our article “Looking Ahead: 2017 – The Year of Tax Reforms,” which we published on November 18, 2016. Many advisors to wealthy families anticipate that the new administration’s policies and views concerning the estate and gift taxes could render moot the proposed IRS regulations, which are written to limit tax breaks on transferring wealth.

These tax changes already are on an expedited pace. A week after the election, Vice President-elect Pence told House Republicans to be ready to move on sweeping legislation next year, and mentioned taxes among the items. On November 15, Kevin Brady, the Texas Republican who chairs the House tax-writing panel, said discussions were already in the works.

With the news of forthcoming sweeping tax reform, many wealth advisers are advising clients to defer making large wealth transfers until the administration and Congress provide more clarity about the rules.  On the other hand, steps can be taken before year-end to defray taxes by booking investment losses now or accelerating deductions to 2016, when tax rates are higher.

These proposed tax reforms are all the more significant and impactful given the Obama administration policies to place tighter restrictions on the way wealth could be passed from generation-to-generation;  policies that were announced shortly before the election.  See the article on valuation discounts we published on August 15, 2016.

Discount Strategy

Families sometimes use a discount strategy to pass on shares in their privately owned partnerships or limited liability companies. Families often took a discount of 20 percent to 45 percent on the value of the stakes to save on estate and gift taxes. The Obama administration tried for years to curtail the benefit of those discounts through legislation, without success, and instead, in August 2016, proposed rules through the Internal Revenue Service to do what could not be done legislatively.

The proposed IRS “anti-discount” regulations have been met with objections not only from  wealthy individuals and their advisors, but also from trade organizations like the National Cattlemen’s Beef Association and the National Beer Wholesalers Association; organizations that have many members who own family businesses.  Family enterprises of all kinds now can expect that the new administration and Congress will halt the IRS effort.

Tax Plans

Any income, including investment income, that can be deferred to 2017 should be, if reasonably feasible. As noted above, discretionary deductions, on the other hand, should be accelerated to this year (2016).

President-elect Trump’s plan replaces the estate tax with a capital gains tax on the appreciation of inherited assets of more than $10 million, subject to some exemptions for small businesses and family farms. He may face a difficulties getting a permanent repeal of the estate and gift taxes, even with a Republican majority in Congress.  Under congressional rules, a permanent repeal would require 60 senators to agree. In 2017, Republicans will hold a thin majority of only 51 or 52 seats, depending on the outcome of Louisiana’s runoff election on December 10. On the other hand, a repeal with a sunset provision is a possibility with only 51 votes required. Keep in mind, the Bush tax cuts of 2001 were set to end in 2010 until the Democrats made those cuts permanent.

We are living in interesting times, and in the world of tax planning, these times are only going to get more interesting.

If you have any questions concerning your estate plan or tax situation, please contact us.

Article brought to you by:
Neil V. Birkhoff
Principal
Principal and Chair, Tax and Estate Planning Group