The GOP Tax Plan’s Effect on Estate Planning

New GOP Tax Plan May Actually Be To Die For

The new House GOP tax plan has caused a stir of controversy in the past few weeks. On November 2, 2017, the House Ways and Means Committee issued H.R. 1 called “Tax Cuts and Jobs Acts.” The now-approved tax plan has severe implications in terms of budget and breaks, causing the representatives involved to come under widespread scrutiny for their actions.

Tax Plan and Estate Planning
The GOP Tax Plan’s Effect on Estate Planning

What does the new GOP tax plan propose in terms of taxes?

The new GOP plan focuses on killing estate taxes. An estate tax is a tax on one’s right to transfer property at the point of death. It consists of an accounting of everything you own or have certain interests in at the date of death. Properties and items eligible for transfer include but are not limited to cash, real estate, insurance, trust funds, annuities and business assets. These properties are then collectively added together to total a Gross Estate. The historic market value of the items is not considered, so what you paid for them or what they were worth when purchased does not play a factor. Once the total gross estate is counted, then come reductions. Reductions include but are not limited to mortgage, estate administration expenses, property and qualified charities. With the new tax plan, this threshold doubles from 5 million to 10 million, and in 2024, the estate tax is eliminated altogether.

The Updated Collection of Estate Taxes

An issue with the proposed GOP plan is escaped taxation. According to House Speaker Paul D. Ryan, the plan allows citizens to collect tax under circumstances that previously did not allow for such actions. “We just think it’s unfair. Death should be not a taxable event, and we should not be stopping people from being able to pass their life’s work on to their kids.” Ryan espoused.

The proposed GOP not only allows one to collect tax on all assets owned but also allows the beneficiaries of the estates to not pay capital gain taxes on the increase in value of assets held by the estates. Capital gain is a profit from the sale of property or of an investment. This virtually allows citizens to collect taxes on properties that may be worth less than what their tax value is, and provides a break on the capital gains tax owed. For example, if a home was purchased for $100,000, is now worth $800,000, and was sold for $1,000,000, the heirs would only owe capital gains tax on the $200,000 difference.

The Effect on the Estate Planning Process

The new tax plan affects the estate planning process due to worry of loss. The newly proposed plan raises a lot of questions for those in the estate planning process and those contemplating buying property. Families who have an income of $470,700.00 or more pay a tax rate of 39.6 percent. The new GOP would apply the 39.6% rate to families whose income is at least one million dollars.  The six steps taken during estate planning are as follows:

  1. Creating an inventory of what you own and what you owe
  2. Developing a contingency plan
  3. Providing for children and dependents
  4. Protecting assets
  5. Documenting your wishes
  6. Finally appointing fiduciaries

Fortunately, the procedure itself remains unchanged, despite the changes brought about by the tax plan. Although the amount one’s beneficiaries will receive may change, the planning process does not.

The greatest benefit from the tax plan with regards to the estate planning process is that grantors know that, assuming an unchanged list of all possessions and debts, their beneficiaries will have the ability to collect taxes on items that are passed on to them, as they will neither have to pay an estate tax nor be responsible for the capital gains since the guarantor’s purchase. This is a major benefit for those with any investment, seeing as the grantors are technically receiving more money than the grantors would have from the same investment. Also, due to the ability to collect taxes, the amount of debt outstanding may decrease significantly depending on how much is received from the capital gains.

This also raises questions about marriage and spouses. The government has a term called portable. When an individual dies, their spouse can claim the unused estate tax exemption amount and add that to their own. When filing for estates, this means that, although the exemption for individuals will double from 5 to 10 million, the surviving spouse in a marriage will see their exemption go up by more, so long as the first spouse to pass away does not use the full exemption.

The Effect on The Beneficiaries of Trusts and Deeds

The proposed GOP tax plan will deeply impact the inheritance and beneficiaries of trusts and deeds. As it stands, the new GOP tax plan would double all exemptions for the Generation Skipping Transfer Tax. The Generation Skipping Transfer Tax, also known as GST, imposes a tax on outright gifts and trust transfers to or for the benefit of unrelated persons more than 37.5 years younger than the donor. The current GST tax exemption amount is $5.6 million per individual and would increase to $11.2 million with the new GOP tax plan. The current exemption amount for married couples is $11.2 million and would increase to $22.4 million. Though an increase in tax exemptions is a benefit, only 0.2% of Americans are expected to pay estate taxes in 2017. If the GOP tax plan is passed, it is expected that with exemptions doubled, the amount of individuals paying both estate tax and GST tax will decrease from 5,000 to less than 2,000.

Planning for the Future

As mentioned earlier, the best thing to do, regardless of whether the GOP tax plan passes the senate, is to undergo the estate planning process as soon as possible. Because the process will remain unchanged, there is no benefit to waiting to hear until it takes effect. Calculate all income and assets and total the combined value. Meet with an estate planning attorney to discuss whether it makes more sense to file separately or with a spouse. Immediately after doing so, start drafting a will. Though the new GOP tax plan may shift the result of how the will is executed, having wishes in solid writing will not adversely impact the execution of how income and assets are spent and to whom they are ultimately distributed. As for estates and other viable assets, draft a trust to benefit from the new GST process in the long run.