How quickly and radically events have changed. A week ago the discussions pertained to a Democratic President and Congress, and now the reality is a Republican President and Congress. For estate purposes the change is dramatic: Hillary Clinton wanted to reduce the amount protected from estate tax to $7 million for a married couple, and impose a maximum estate tax rate of 65 percent. President Trump wants to eliminate the estate tax.
Despite the significant differences between the two positions, as a practical matter, will it matter? Probably not. Yes, there is a Republican Congress, but Democrats can prevent estate tax repeal by filibuster. Republicans need 61 seats to block a filibuster and have 51 (or perhaps 52) seats. Further, it is questionable whether there is sufficient sentiment to push for total repeal with the current high exemption amounts. Not to mention, as we know, political parties gain and lose control.
So what does it mean? High exemption amounts - the amount that can be protected from estate tax - mean few people are subject to estate tax. On the other hand, increasing income tax rates result in more people paying more income tax. The consequence is that, for most people, tax planning for the inevitability of death has been turned on its head, with high asset values for a step-up in basis to avoid income tax trumping low asset values to avoid or reduce estate tax. Even now, this planning will likely prevail.
Of course, non-tax objectives remain essential to an estate plan. For example, probate avoidance, protecting a surviving spouse from losing his or her assets, and protecting a child’s inheritance from divorce or a lawsuit, remain paramount. Although the tools to accomplish these non-tax objectives remain trusts, how trusts are used in view of the new tax paradigm has changed.