A collection of insightful and informative articles from The Myerson Agency‘s “Recipes for Success” newsletter
One of the less publicized (but no less controversial) components of President-elect Trump’s campaign platform during the run-up to the election is the overhaul of our tax system. While possibly one of the most significant aspects of his platform, this got lost in much of the rhetoric surrounding other more “tawdry” issues. This tax system overhaul includes significant changes in the income tax code and the repeal of estate taxes. To all those (less than 0.07% of Americans) rejoicing at the prospect of not having to pay estate taxes at their death, I say the following: do not set off the fireworks just yet. The “fat lady” isn’t set to sing, and frankly, she’s probably not even warming up her vocal chords.
While I believe there will be much debate in both houses to effectuate a complete repeal, there are many reasons this may be a non-finisher. Let’s first take a brief look at Trump’s actual position on the repeal of the estate tax. While he is calling for an elimination of what he and other mega-wealthy call the “death tax,” his platform actually advocates a compromise position whereby this “death tax” will be replaced by an income (capital gains) tax on the “untaxed” appreciation of assets passed to the decedent’s beneficiaries at death. While this position has not been clarified and leaves much open for speculation on its implementation, the net result could remain costly and complicated.
While the 20% current federal capital gains tax rate is lower than the rate at which an estate is taxed, the effective tax paid could be the similar. Why? Notwithstanding the 40% statutory estate tax rate, the effective rate paid by decedents subject to the estate tax is much less. For example, in 2013, the effective estate tax rate for estates in excess of $20M was 18.8%. This is due to several factors, beginning with the exemption from estate taxes on the first (2016) $5.45M per taxpayer, or $10.9M for a married couple. Second, many wealthy taxpayers achieve a lower effective tax rate through planning strategies prior to death. Hence, call it what we may, there will still most likely be a tax on assets transferred at death. Additionally, a capital gains-like tax imposed on these assets will require meticulous accounting for the “tax-basis” of those assets in order to determine the untaxed gain. Under current law, these assets are valued at death and “stepped-up” to determine the estate tax, requiring less record-keeping for the original basis or enhancements to the basis.
Undoubtedly, the House of Representatives would support and affirm a complete repeal of the tax. This has been a strong GOP position for decades, however, it would take 60 senators to permanently repeal the estate tax and avoid a filibuster. With only 52 GOP members, and a very small handful of Democratic senators who may support the repeal, the best Mr. Trump can hope for is to either use the repeal as a compromise to push through other income tax reform, or implement a Bush-like maximum 10-year temporary sunset, which would only require a simple majority.
To even get Congress to take a look at repeal, Mr. Trump will need to overcome some serious headwinds. Most significantly, he’d need to find a way of providing something satisfying to his base of working and middle-class voters. Failure to appease them in favor of pushing and signing into law a massive tax break for him and his family could be extremely problematic at the very least. Hence, the timing of any action could also become an issue, and may get delayed by more pressing agenda items.
Moreover, he and GOP members of Congress would need to turn a deaf ear on some significant lobbying efforts that are bound to come from sources they may find to be just too squeaky—most particularly, not-for-profit organizations and foundations, which stand to lose billions in charitable donations often made solely for the purpose of reducing or avoiding estate taxes. And then there’s the life insurance industry, which employs an estimated 325,000 home-office-only personnel, many of whom work in the very states credited with giving Mr. Trump his Electoral College majority. The life insurance industry sells billions of dollars of insurance death benefit annually to create liquidity for large estates to pay the estate tax, or as a replacement for assets otherwise donated through tax planning techniques. While much, if not all, of this life insurance death benefit would still be required in the event of a capital gains tax, the industry does not like change that could be perceived as negative, and will fight tooth and nail to protect this revenue source.
And then of course, there’s always the perceived threat of a future Administration coupled with a willing Congress to reverse any legislation it deems inappropriate. This would not be unprecedented, and I wouldn’t bet against it.
This article is not intended to explore or judge the relative value of maintaining or eliminating the estate tax. While I have strong opinions on the subject that take into account the possibility of creating family dynasties or “permanent aristocracies,” the $19 trillion (and definitely growing) deficit, the ever-widening schism between the “haves” and the “have-nots,” and perhaps, mostly, the impact on our charitable institutions, I’m also swayed by the impact it would have on my industry. Hence, I’m not here to make a case for repeal one way or the other.
In terms of doing current planning pending resolution of any final legislation, it may seem very appealing to take a “wait and see” position. And while that might make sense for many, I would strongly caution anyone who is considering the use of life insurance as a tool for wealth transfer liquidity to come off that fence. It’s a potentially dangerous place to sit, particularly if planning gets delayed to a point it becomes more difficult to accomplish due to time, health, age or other potential issue.