Before Donald Trump took office, Congress had already made sweeping changes to the Internal Revenue Code regarding estate, gift and generation-skipping taxation. Portability of the unified credit was first enacted in 2010, and was made permanent by the American Taxpayer Relief Act of 2012. And an IRS ruling effective in June 2017 added time that a surviving spouse has to elect portability and protect from estate tax some of his or her own gifts and transfers on death.
With the maximum estate tax rate now set at 40 percent, portability of the exclusion made permanent and a little easier to elect, and state death tax credit only applying to certain state returns, there’s a lot on a tax practitioner’s plate today if he or she advises clients on estate and gift tax planning. While there may be uncertainty surrounding the Trump administration’s approach to federal tax reform, there are clear steps to take for the time being under changes made under President Obama.
Estate and Gift Tax Legislative Reform
After more than 10 years of self-adjusting and sun-setting exemption amounts and rates for federal estate, gift and GST taxes, the American Taxpayer Relief Act made exemptions and rate structures for estate and gift taxes permanent – at least until Congress changes them again! With a system that is for now totally unified, spousal portability of the estate tax exclusion now means that if the decedent spouse does not fully use his or her exclusion – which is $5,490,000 in 2017 – then the surviving spouse inherits the deceased spouse’s exclusion and can use it for gift or estate tax purposes.
The basic exclusion amount thus functions similarly to an exemption, and applies to the total of estate and gift tax transfers. It is also subject to cost of living adjustments. There may be reasons not to elect portability, however, such as a second marriage or lack of trust in a surviving spouse’s financial skills.
As for gift taxes, the Trump administration has proposed the elimination of the federal estate tax but has not indicated whether the federal gift tax or IRC Section 1014, under which the basis of property acquired from a decedent is measured by its fair market value upon death, will survive. Tax practitioners will want to keep an eye on Congress – and Trump – regarding this issue.
Healthcare’s Role in Estate Planning
In addition, there are financial planning considerations under the Affordable Care Act, which is still the law of the land.
A Medicare tax of 0.9 percent is levied on “high income,” and a 3.8 percent tax is added for net investment income, for example. It’s important to keep in mind that for clients with wage incomes over $250,000 (married and filing jointly) or $200,000 (single and head of household), and for those with income from investments, trading, rental and sales of certain property, these considerations are fully in play for the 2017 tax year.
Get a Grip on Your Estate Planning Practice
Eli Financial recently hosted a webinar, “Estate Planning for 2017 and Beyond,” with taxation attorney Arthur J. Werner, who explained all the ins and outs of the recent updates to the IRC, as well as hot-topic estate and gift tax issues and planning techniques. With a helpful comparison of planning techniques from Arthur, you’ll be on your way to effective estate planning for your wealthier clients this year – and beyond.
