Issues and Opportunities in Estate Planning Under the New Congressional Leadership

The political ground appears to be shifting on the taxation of assets that are transferred among family members as part of their estate planning.

While many details have yet to emerge, there are indications that in 2017 there could be some tax law changes that would help families and their businesses preserve more assets and reduce tax liabilities.

We reviewed those issues on May 15 at a Business Valuation Conference sponsored by the New York State Society of CPAs.

Our presentation was entitled “Estate Planning Valuation Issues and Opportunities under a Republican Regime.”

Valuation Discounts

Mr. Pruskowski spoke about the process of determining valuation discounts and provided case studies.

This included a review of how Prager Metis advised a closely held private investment company in reducing its estate value. We determined that discounts for lack of control (25 percent) and lack of marketability (10 percent) were appropriate.

We reached a compromise with the IRS and saved the client approximately $13 million in federal and state estate taxes.

Possible Tax Legislation

Ms. Lumpkins provided details on changes that reportedly are under consideration by the administration and by Republicans in Congress.

Her focus included the estate tax.  Since 2010 when the estate tax exclusion was $5,000,000, the estate tax exemption amount has been indexed for inflation.  For 2017, the exemption amount is $5,490,000.  The top tax rate is 40 percent.

In his campaign, President Trump promised to repeal and replace the estate tax.  The tax plan that he released in late April calls for repeal of the “death tax.”  In their “blueprint” published in June 2016, the Republicans’ Task Force on Tax Reform also calls for repeal of the estate tax.  Taxable estate tax returns represented 1/5 of 1% of deaths in 2013.

One possible replacement for the estate tax is a “capital gains tax.”  Such a tax would impose a tax at favorable capital gains rates on inherited assets.

The gift tax is often mentioned in tandem with the estate tax. The lifetime gift tax exclusion amount is “unified” with the estate tax exemption amount for a combined total of $5,490,000 for 2017.  The top tax rate is 40% and the annual gift exclusion amount is $14,000.

The Trump campaign was silent on the gift tax, and his tax plan did not mention it. This was probably not an oversight.  The gift tax has historically served as a backstop to leakage from the income tax due to income shifting, and its repeal may not be fiscally expedient.

Also of note is the administration’s plan to reduce the number of personal income tax brackets to three brackets: 10 percent, 25 percent, and 35 percent. The plan also calls for one business tax rate of 15 percent.  This rate would presumably apply to business income not just from corporations, but also from flow-through entities, such as limited liability companies and S corporations.  The decrease in rates could impact the choice of entity decisions – including state and local considerations – and business valuations.

In April 2017, President Trump issued an executive order to the Treasury instructing the Treasury to review 2016 tax regulations.  The Treasury’s review may include a reexamination of the Proposed Regulations under Section 2704.  The long-awaited Proposed Regulations issued by the Treasury Department last year included provisions that would reduce the number of situations in which valuation discounts could be taken due to lack of control and lack of marketability.  Under President Trump, it is expected that the Treasury Department will not issue final regulations this year.  Although the Treasury’s rationale behind the Proposed Regulations may be enduring, repeal of the estate tax may render the debate moot.

As of the end of June, there were no tax bills that had moved beyond committee review in the U.S. House, where tax bills must originate.

We will keep you informed on developments concerning tax legislation.

To view the complete presentation please click here.