The Estate Tax Is at Death's Door With Trump Presidency

Retirement Dow Jones Newswires

The American estate tax turned 100 this year. It probably won't live to see 101. 

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Both President-elect Donald Trump and Republicans in the House of Representatives have issued proposals to end the tax, and Senate Finance Committee Chairman Orrin Hatch (R., Utah) has opposed it as well. Launched in 1916, the tax was first imposed to help finance World War I and more recently was meant to limit concentrations of wealth. 

"Estate-tax repeal seems virtually certain," says Michael Graetz, an estate-tax expert who was a Treasury official during the administration of George H.W. Bush and now teaches at Columbia University's law school. 

Of course, there is no certainty the tax is dead, since it is difficult to predict exactly what Congress will do -- or when. Meanwhile, people should sign wills and continue to make certain types of gifts, while postponing others, tax advisers say. 

Under current law, about 0.2% of Americans who die in 2017, or about 5,200 people, are expected to have taxable estates, according to the Tax Policy Center in Washington. This small sliver is far below the high-water mark of 7.7% in 1976, when the estate-tax exemption was $60,000. 

This shrinkage is due to the growth of the estate-tax exemption. Today, the combined federal estate- and gift-tax exemption is $5.45 million per individual, or $10.9 million per married couple. Inflation indexing will raise it to $5.49 million in 2017. 

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If the current estate tax is repealed, says Mr. Graetz, "it will give a tax cut to the very wealthiest millionaires and billionaires," including Mr. Trump, several members of his cabinet, and several dozen members of Congress. In 2014, 16 senators and 44 representatives reported family assets ranging from at least $5 million to $10 million or more, according to the latest data compiled by the nonpartisan Center for Responsive Politics in Washington. 

Less clear is what will happen to the gift tax, which applies to transfers during life, and to an income-tax provision known as the "step-up." The step-up often allows assets held at death to bypass capital-gains tax. This provision applies to all assets, including those that have been held for decades and are highly appreciated. 

Mr. Trump's proposal appears to say that the step-up would disappear above an exemption of up to about $10 million. Beyond that, the dead person's cost of the asset -- the starting point for measuring capital-gains tax -- would transfer to the heir. 

For example, say a very wealthy father leaves his daughter shares of stock that he bought for $10 each and that are worth $75 each at his death. Under current law, if the daughter sells each share for $85 two years later, then she will have a taxable gain of $10 per share. But Mr. Trump's plan seems to say that her gain per share could be as high as $75 if estate assets exceed the exemption. 

The Trump transition team didn't respond to requests for clarification of these issues. 

Amid these uncertainties, here are planning tips: 

*Don't wait to sign a will. Whether or not you are subject to estate tax, it is important to have a valid will -- period. If you are worried about what Congress will do, consider building in flexibility, such as by giving an executor or trustee leeway to make changes, says Carol Harrington, a veteran estate lawyer with McDermott, Will & Emery in Chicago. 

*Avoid taxable gifts, for now. Ms. Harrington is advising clients not to make irrevocable moves that risk a bill for gift taxes, unless there is a compelling reason, such as transferring shares in a company about to go public. 

But if you are accustomed to making annual tax-free gifts to relatives or friends, feel free to go ahead. Each individual can make nontaxable gifts up to $14,000 per recipient a year, and one partner of a married couple can transfer up to $28,000 per recipient if the spouse consents and gift-tax returns are filed. 

*Go slow on discounts. Earlier this year, the Treasury Department proposed to curb "valuation discounts," a technique used by the wealthy to lower estate and gift taxes. Now the rush is off, because these regulations seem unlikely to survive, at least in current form. 

*Consider timing. In the past, some estate-tax changes have been retroactive and others haven't, so it is hard to predict what Congress will do. It is also unclear whether changes will be permanent or will expire at some point, as happened in 2010. "There may be continued uncertainty, even when Congress has acted," says Ms. Harrington. 

Write to Laura Saunders at laura.saunders@wsj.com

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