Time to Plan for the Death of the “Death Tax”? | Lord Abbett

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Practice Management

Advisors are already prepping clients for sweeping changes coming under President-elect Trump's administration next year.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).

(Bloomberg) Some of the wealthiest families in the United States are hoping for a $21 billion benefit from President-elect Trump next year.

Trump is gearing up to embark on the biggest U.S. tax overhaul in three decades. His proposals include cutting income and corporate taxes and eliminating the so-called “death tax,” which is paid primarily by the richest 10% of earners, according to the Tax Policy Center. Advisors to wealthy families and their offices also anticipate that the new administration’s approach to estate and gift taxes could negate rules they were bracing for, which sought to limit tax breaks on transferring wealth.

Trump’s tax changes already appear to be on the fast track. A week after the election, Vice President-elect Mike Pence told House Republicans to be ready to move on sweeping legislation next year, and mentioned taxes among the items. On November 15, Kevin Brady, the Texas Republican who chairs the House tax-writing panel, said discussions were already in the works.

Given the prospect for sweeping tax reform, advisors are telling clients to hold off on making large wealth transfers until there’s more clarity about the rules. They’re also advising them to take steps before year-end to defray taxes by, for example, booking investment losses now.

They and their businesses are reevaluating, or putting on hold, strategies for transferring money to heirs, as the new administration could work with a cooperative Congress to reform or repeal federal estate and gift taxes among its early moves. That would be an about-face from President Obama, who sought to place tighter restrictions on the way wealth could be passed from generation to generation.

“Eliminating the death tax will equate to an enormous gift,” said Peter Rup, who manages about $900 million for rich families at Artemis Wealth Advisors in New York. The IRS collected $21 billion from taxes on estates and gifts in its fiscal year 2016, according to data from the U.S. Treasury Department.

Using the Discount Strategy

Wealthy families sometimes use a discount strategy to pass on shares in their privately owned businesses and family offices—that is, firms that handle the financial affairs of a single family and are often structured as partnerships or limited liability companies. Families often took a discount of 20–45% on the value of the stakes to save on taxes, according to a report by law firm White & Case. The Obama administration tried for years to curtail the benefit through legislation, without success, and instead in August 2016 proposed rules through the IRS set to do just that.

The proposed change was met by objections not only from some of the country’s wealthiest individuals but also from trade organizations such as the National Cattlemen’s Beef Association and the National Beer Wholesalers Association. Both organizations have many members who own family businesses.

Family enterprises of all kinds are now optimistic that the new administration will halt the IRS effort. Under the new president, any such rules “could be pulled,” said John Olivieri, a White & Case lawyer who works with wealthy families.

Under current law, an individual can leave up to $5.45 million to heirs without paying federal gift or estate tax. Above that threshold, the tax is assessed at a 40% rate.

Married couples can shield estates worth as much as $10.9 million from the tax this year.

Deferred to 2017

“More than ever, any income, including investment income, that can be deferred to 2017, should be,” Nicholas Bertha, director of wealth and trust planning at Fieldpoint Private, wrote in a client advisory after the election. "Discretionary deductions, on the other hand, should be accelerated to this year."

Trump’s plan would replace the estate tax with a capital gains tax on the appreciation of inherited assets of more than $10 million, subject to some exemptions for small businesses and family farms.

He may face a difficult time ushering in a permanent end to the estate and gift taxes, even with Congress on his side. Under current rules, a permanent repeal would require 60 senators to agree. In 2017, Republicans will hold a thin majority of only 52 seats.

In the meantime, advisors to high-net-worth families on their trust and estate plans are reevaluating. "Estate planning and gifting strategies will still be extremely important," said Ida Liu, managing director and global market manager to the metro New York region for Citi Private Bank. "But certain types of trusts may be more or less favorable going forward if the estate tax is repealed or restructured."

—by Simone Foxman


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