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There is more than enough work to go around even if the estate tax is repealed as part of Congress’ broader efforts to overhaul the U.S. tax system, according to accountants and wealth planners.
“Are we going to have to find a different field? Are we all going to have to become fiduciary litigators if the estate tax is repealed?” said Gideon Rothschild, a partner at Moses & Singer LLP who serves high-net-worth clients. “No. I think planning is still going to be alive,” he said. Rothschild is a member of Bloomberg BNA’s Estates, Gifts & Trusts Advisory Board.
In fact, some attorneys see repeal as potentially being a boon for their businesses, especially if the tax is replaced with a capital gains tax such as the one proposed by President Donald Trump on the 2016 campaign trail.
If anything, “estate planners are going to be busier because every time our government—just historically speaking—tries to simplify the tax code, things get more complicated and it creates more work for us,” said Victoria Abramov, a tax principal at Berdon LLP, whose practice includes advising clients on gift and estate tax matters.
Changes in law—such as the 2001 Economic Growth and Tax Relief Reconciliation Act that led to the temporary repeal of the estate tax in 2010—actually created more work for wealth planners because clients had to prepare for a new system, said Lester Law, a managing director at Abbot Downing. And now planners are braced for the possibility of repeal. “We realize now it’s not a big deal because we’ve already ridden that roller coaster once,” said Law, who also serves on Bloomberg BNA’s advisory board.
On the campaign trail Trump proposed substituting the estate tax for a capital gains tax with a $10 million exemption. A House Republican plan at the center of the congressional effort to revamp the tax code only calls for repeal.
Planners and lobbyists disagree whether substituting one tax for another would work like the system in Canada where the gains tax is triggered automatically upon a decedent’s death, or if the tax would be imposed when beneficiaries dispose of their assets. Several attorneys told Bloomberg BNA the first scenario seems to be true. However, Palmer Schoening, chairman of the Family Business Coalition, said Trump’s campaign advisers indicated that the capital gains tax wouldn’t be triggered at death.
Regardless, a new capital gains tax would require estate planners to track basis, the purchase price of an asset. That will create a “tremendous amount of work,” Abramov said. Under today’s system, a person can hold onto his or her assets until death and get a “step up” in basis to fair market value, allowing beneficiaries to avoid paying capital gains tax on the inherited property.
The proposed new system would look more like the carryover basis regime that came into play when the estate tax was repealed in 2010, she said. Under a carryover basis system, heirs retain the decedent’s purchase value for the asset, Abramov said.
Basis can be difficult to track for a number of reasons—especially when dealing with partnership and real estate assets. The property may have been purchased long ago and taxpayers often don’t keep thorough records, Abramov said. Additionally, real estate assets can be refinanced for cash, which is hard to track, and some can have a negative basis, she said.
Rothschild pointed out that immediately following an estate tax repeal, attorneys and accountants will be busy revisiting existing wills and trusts. “We may be very busy in the next year or two just taking care,” of those revisions, he said.
This will be especially true for trusts with formula clauses, he said. Formula clauses are used in estate planning to correct the value of property transferred in a lifetime gift or a testamentary transfer. They also can be part of planning structures such as marital deduction and credit shelter trusts.
“If the federal estate tax is repealed and you have a formula clause in your estate, you’re going to have a problem,” Abramov said. “If you’re living in a state that has state estate tax, and you fund some kind of a marital trust up to the amount that is tax-free under the federal estate tax—and there’s no estate tax—zero goes into the trust” and that’s an issue, she said.
Making plans adjustable is going to be important going forward, according to Patrick Beaudry, a director of wealth planning at Abbot Downing. A lot of the plans that came out of the temporary repeal in 2010 had built-in flexibility with two options—steps to take if the estate tax is repealed at the time of death and steps to take if it isn’t. These types of strategies will continue to be essential in the future, he said.
Richard Behrendt, director of estate planning services for Annex Wealth Management and a former estate tax attorney with the Internal Revenue Service, said he’s been making changes to his practice over the past few years. Because of that, an estate tax repeal wouldn’t alter his practice much, he said.
Congress made a $5 million estate tax exemption indexed each year for inflation permanent in 2013 as part of the American Taxpayer Relief Act of 2012. The act also enabled a living spouse to take on the unused exemption amount of a deceased spouse.
The gradual increase in the exemption amount—climaxing in 2013—paired with the ever-existing chance of repeal after 2010, forced planners to retool, Behrendt said. There isn’t as much of a need for high-net-worth planning because fewer and fewer people are subject to the estate tax, he said. Only about 0.2 percent of all estates currently pay any estate tax, according to the Tax Policy Center.
Since 2013, many planners have broadened their practices beyond the very wealthy to include middle class families, Behrendt said. For those taxpayers, it is most important “to know how to structure their estate in a way that’s going to make it better for them and easier for their kids, and helps plan for events like incapacity and premature death.”
In terms of tax considerations, retirement accounts are a significant consideration for middle-income taxpayers, he said. “With very few exceptions, you look at their balance sheet and their biggest assets are retirement accounts—IRAs, 401ks.” The complexities of “trying to preserve the tax-deferred growth as you pass that to a spouse or children is really an important part of that typical family’s planning,” he said. “So I think that’s taken precedent over estate tax planning.”
Rothschild pointed out that all clients—no matter how wealthy they are—can benefit from estate planning that isn’t driven by taxes, such as how to protect assets from divorce, creditors and litigation. Clients may also have special drafting needs for children and adults with disabilities or Medicaid planning. These areas will matter, regardless of whether the estate tax is repealed, he said.
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