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The Yogi Berra Era of Estate Planning?
Some Legends Never Die and Witty Words of Wisdom Never Cease to Apply

Susan P. Rounds, JD, CPA, LL.M. (taxation), AEP®, TEP

It’s Déjá Vu All Over Again!

Having just returned from the fabulous 53rd Annual NAEPC Advanced Estate Planning Strategies Conference where we learned about so many proposed tax changes and the possible outcomes, it feels a little like Ground Hog Day. Estate Planners are, of course, planners and we like to know what is happening so we can help our clients. In what was previously thought of as a stodgy profession, we now face exciting “what ifs” on a fairly consistent basis. (And, speaking of consistent basis . . . read much more about that in our past president Jordon Rosen’s article posted in this Journal edition.)

As exciting as it may be for us, the current environment may actually quell the desire to plan in our clients. Many may feel that it would be better to wait and see rather than take any steps now. One of the best nuggets to bring up with clients was pointed out at the NAEPC Conference: Over the course of U.S. history, “death taxes” in various forms have already been repealed and reinstated 4 times. This would be the 5th!

It’s That Fork in the Road — So Take It!

Not knowing what the outcome will be, and already having seen the repercussions of static planning documents being interpreted in light of dynamic new law we know that FLEXIBILITY is more important than ever. We must help clients plan for all contingencies — so no matter which turn is taken, the path is clear. We are reminded of the changes made to the exemption due to ATRA’s passage in 2013, which in some estate plans could have disinherited a spouse. Now we have a situation where certain drafting in a credit shelter trust could cause the same problem there if written such that the funding amount would equal the federal exemption amount. If there is no estate tax, there will be no exemption amount, so nothing goes to the trust. On the other hand, a particular formula clause could be interpreted so the entire estate goes to the trust, since it could all go tax free.

In reading the tea leaves, we know that Senator John Thune, R-SD, stated that there is every intention to repeal the estate tax next year. He expects that there would be consensus support for his proposal to repeal the estate tax as part of a broad tax overhaul in the 115th Congress stating that, “If we can get into a debate about comprehensive tax reform, the odds are good that we can repeal the estate tax.” (Recall that repeal is part of the agenda for both Pres-Elect Trump and for the House “ABW” (A Better Way) tax proposal.)

Of course, there are opposing voices. While many Republicans view estate tax repeal as a way to preserve jobs and save small businesses, others see it differently. As stated by Minnesota Democratic Rep. Keith Ellison, probable Democratic National Committee head, “This is 100 percent self-serving— billionaires lining their own pockets. It means we are going to institutionalize an American aristocracy based on wealth.”

If You Don’t Know Where You Are Going, You Will Wind Up Somewhere Else!

So, we have two sides to the story of potential estate tax repeal in a country that still has a two party system. The pendulum is ever swinging – a phenomena that has been evidenced in this exact situation numerous times. As noted, federal taxes imposed upon the transmission of or the receipt of property by reason of death have been repealed and reinstated 4 times. It’s important to remind clients that planning, and most importantly planning with flexibility built in, is critical to use change to their advantage.

No matter which path is chosen, repeal or no repeal, wealth in motion will be taxed! No one is currently talking about eliminating the federal GIFT tax. AND instituting a capital gains tax in lieu of the federal estate tax would be the most likely result of repeal. On top of this, the various states have their own tax systems that must be planned for. For example, California itself does not currently have an estate or gift tax, but it has the highest state capital gains tax rate in the US — topping out at 13.3%. For those clients who have not initiated the planning process, let’s get started. For those who have a plan in place, let’s review what they have.

This information is provided for discussion purposes only and is not to be construed as providing legal, tax, investment or financial planning advice. Please consult all appropriate advisors prior to undertaking any of the strategies outlined in this article, many of which may involve complex legal, tax, investment and financial issues. This communication is not a Covered Opinion as defined by Circular 230 and is limited to the Federal tax issues addressed herein. Additional issues may exist that affect the Federal tax treatment of the transaction. The communication was not intended or written to be used, and cannot be used, or relied on, by the taxpayer, to avoid Federal tax penalties. MRG026830