We’ve gotten a lot of questions about the impact of President elect-Trump’s surprise victory on our clients’ estate and tax planning goals and wanted to share a few quick thoughts.
Tax reform has been on the top of President-elect Trump’s proposals throughout the election cycle. And while countless details still need to be fleshed out – all of which are subject to negotiation — it’s important to remember that the Republicans now control the Presidency as well as both houses of Congress. Given the unprecedented authority in the modern era to pass and sign bills into law, the Republicans are very likely to execute numerous policy changes.
Key areas of reform likely will include 1) personal income tax, 2) corporate tax, and 3) death tax.
1) Personal Income Tax
Trump’s proposed tax system would provide tax cuts across the board, with the largest cuts occurring at the top, as the highest bracket rate will fall from 40% to 33%. He also intends to simplify the current seven bracket system to three and add significant tax credits for child care. And he plans to increase the standard deduction for couples from $12,600 to $30,000.
There could, however, actually be tax increases for some groups of people, such as single-parent households because Trump proposes removing head of household filing status and personal exemptions.
Another large proposed change is the repeal of the Alternative Minimum Tax (AMT), which seeks to ensure that high-earners with significant deductions pay a minimum amount of tax. This change would help individuals in states with high income tax and those individuals with large property tax bills, as these deductions often bring tax rates down to a level where the AMT comes into play.
Key Takeaways for Our Clients: We suggest to our clients to defer taxes and accelerate depreciations (to lock in higher deductions at the higher rates).
2) Corporate Tax
The key change for businesses is a proposed decrease in the corporate tax rate from 35% to 15% with a corresponding elimination of many business deductions. Additionally, the tax rate on profits stashed overseas would be reduced to 10%, which can be paid over 10 years.
Key Takeaways for Our Clients: Such a drastic drop will mean that businesses will want to pay expenses as early as they can (to maximize deductions) and defer any taxes to future cycles. Notably, the unified business rate of 15% means that all business income including pass-through income from an S corporation, partnership, or sole-proprietorship that is reported on the individual’s tax return would be subject to this rate. Accordingly, if a highly compensated employee can transition to an independent contractor, their tax rate could decrease from 33% to 15%.
3) Death Tax
Trump hopes to repeal the current 40% estate tax for those above $10.9M (for couples). However, he plans to replace it with a deemed recognition of capital gains tax on all assets at death with a $10M exemption on gains per couple, with everything above that being taxed at regular capital gains rates. Additionally, Trump plans to disallow gifts of a decedent to a private charity.
Key Takeaways for Our Clients: There are a few unanswered questions and details about the proposals that will determine a correct course of action. It is unknown what will happen to the step-up in basis that currently occurs after death of the owner. Also, will an executor be vested with the right to select which holdings receive step-up basis versus carryover basis? We are advising our clients to continue monitoring Trump’s policies before taking action. But we are encouraging them to accelerate gifts to private charities to as early as they can; additionally, we encourage putting a contingency provision in estate plans to make gifts for public charities in the case that a private charity gift would have adverse tax and economic consequence.
Of course, should you have any specific questions, we encourage you to reach out and schedule a consultation so we can help you plan for the flurry of upcoming changes to the tax code.