Before last fall’s presidential election, President Donald Trump had officially proposed at least two different plans for a tax overhaul that included a repeal of the federal estate tax. Now that the inauguration is over and Congress is controlled by Republicans, wealth planning professionals are preparing to navigate any potential changes.
In this interview, Mark Williamson, a partner at Alston & Bird, leader of the firm’s Wealth Planning Practice Group and author of Bloomberg BNA’s Portfolio 943 T.M., U.S. Income Tax Treaties – Provisions Relating Only to Individuals, shares some of his insights regarding the potential changes to the federal estate tax and what that might mean for state estate taxes.
Bloomberg BNA: Do you think the federal estate tax will be repealed this legislative session? If the federal estate tax is not repealed, how might the federal estate tax be modified?
Williamson: Yes, I think repeal is highly likely—but nothing is ever certain. I’m not sure whether the gift tax will be repealed, or whether we will get “carryover basis” as part of estate tax repeal.
Bloomberg BNA: Can you explain how carryover basis would work if the federal estate tax is repealed? How does that compare with what we currently have?
Williamson: Currently, if you own $100 worth of Coke stock when you die that you paid a dollar for, after your death, the basis of that stock is $100 and so there's no gain if you sell it for $100. Most estate tax repeal proposals in the past have provided that after your death the basis of that stock would remain at one dollar and there would be $99 of gain when you sell it.
Bloomberg BNA: How will changes to the federal estate tax impact estate taxes on the state level?
Williamson: State death taxes are no longer creditable against federal estate tax, but they can be deducted. Without a federal estate tax against which to use the deduction, the real cost of a state death tax is higher. It’s possible that one or more states with death taxes may repeal or modify them.
Bloomberg BNA: The number of states with estate, gift or inheritance taxes has been dwindling steadily over the years. Why is that?
Williamson: When state death taxes were creditable against federal estate tax, if the state tax was exactly equal to the maximum credit, there was no real cost to a state death tax (it just moved money from the federal government to the state). When the credit was eliminated, these taxes had a real cost, so many states repealed them.
Bloomberg BNA: As you mentioned, several states repealed their estate taxes after the federal credit for state death taxes under I.R.C. § 2011 was replaced with a deduction under I.R.C. § 2058. Since then, states with estate taxes untied to the federal credit have also been trending towards eliminating death taxes. What factors do you think are driving this trend?
Williamson: I think it reflects the unpopularity of estate taxes.
Bloomberg BNA: While we are waiting to see what Congress will do at the federal level, what should tax professionals be focusing on regarding wealth planning issues on the state level?
Williamson: Planning techniques that move assets down to descendants or trusts for their benefit are still a good idea. Repeal is not certain, and the estate tax could be reinstated at a later time.
Bloomberg BNA: You mentioned that certain planning techniques that move assets down to descendants or trusts for the descendants’ benefits is a good idea. What type of planning techniques are you referring to exactly
Williamson: This is really just a question of giving assets to your descendants today when they are worth less than they will be in the future.
Bloomberg BNA: And what kind of trusts would most benefit descendants?
Williamson: Usually a long-term trust that lasts for multiple generations and is designed not to be subject to estate tax again when these generations die off in the future—a so-called generation-skipping trust. But there is a limit on how much you can transfer to this kind of trust—about $11 million for a married couple.
Bloomberg BNA: If the federal estate tax is repealed only temporarily like it was in 2010, what impact would that have on state estate taxes? And what sort of problems could that cause for wealth planning practitioners and their clients?
Williamson: There will likely be at least a few states that have an estate tax even though there is no federal tax. This can be a problem for practitioners and their clients, particularly when out-of-state property is involved, because these taxes can be easy to overlook.
Bloomberg BNA: Do you have any other comments?
Williamson: The possibility of gridlock can never be eliminated entirely!
Continue the discussion on BNA’s State Tax Group on LinkedIn: Will the federal estate tax be repealed? How will you address these issues for your clients?
For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library.
Follow BBNA on Twitter: @BBNAtax
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)