Earlier in November 2017, Republicans in the U.S. House of Representatives unveiled their tax reform bill. This bill, the Tax Cuts and Jobs Act, is also called, for the sake of brevity, the GOP Act. The GOP Act, if passed, would be a significant revision of the U.S. tax code.
While the GOP Act is likely to undergo revision before it is voted on, and is sure to face a fight from Democrats and other groups that oppose some of its possible effects, in its current iteration it contains provisions that could be beneficial to individuals planning to pass their wealth on to future generations. Here are some of the most important aspects of the bill, from a wealth management and estate planning perspective.
Repeal of the Estate Tax and GST Tax
Unsurprisingly, given recent Republican tax reform proposals, the GOP ACT would repeal the estate tax and the generation-skipping transfer (GST) tax—eventually. Both taxes would be repealed completely for individuals dying after December 31, 2023. Between January 1, 2018 and that time, the basic exclusion amount would be doubled from $5 million to $10 million.
Currently, only 0.2% are subject to estate tax. If the GOP Act is signed into law, even before full repeal, the number of estates subject to the tax will be even fewer. Individuals may currently transfer $5.6 million before being subject to tax; the GOP act would double that amount before the estate tax disappeared entirely in 2024.
What about the gift tax under the GOP Act? It would remain in place, with two important modifications. For gifts made after December 31, 2023, the maximum gift tax rate would be lowered to 35 percent. In addition, the increased basic exclusion amount that applies to estate and GST taxes would continue to apply to taxable gifts in 2024 and beyond. The practical effect of these two changes is to gut the gift tax, which was intended to discourage taxpayers in higher tax brackets from transferring income-producing assets to family members or others in a lower income-tax bracket as a way to reduce income taxes.
If the bill passes, and your estate plan was drafted with an eye toward avoiding the estate tax, you will want to consult your estate planning attorney to see if your plan needs revision.
President Trump may have campaigned on a proposal to replace the GST and estate taxes with capital gains tax on certain unrealized appreciation in assets over $10 million dollars acquired from a deceased person, but this proposal didn’t find its way into the GOP Act. Nor does the GOP Act propose to change the current basis adjustment for property acquired from a deceased individual.
Given the GOP Act’s proposals, if the bill passes, and your estate plan was drafted with an eye toward avoiding the estate tax, you will want to consult your estate planning attorney to see if your plan needs revision.
The GOP Act and Retirement Accounts
The aspect of tax reform that has stirred the most anxiety among Americans has been the spectre of change to their retirement accounts. Currently, taxpayers may contribute up to $18,000 in pre-tax dollars to their retirement accounts. Republican members of Congress had considered capping this pre-tax contribution at $2,400, a move which might well have hampered taxpayers’ ability to save for retirement. Those who were aghast at the possibility of this cap will be relieved to learn that it is not mentioned anywhere in the GOP Act.
Another previously-proposed change regarding retirement accounts involved the ability of non-spouse beneficiaries of an 401(k)/IRA to “stretch” the distributions from an inherited account over their life expectancy. The Senate Finance Committee in 2016 proposed limiting this to a five-year payout. The effect of this shortened payout period would have been to limit the tax deferral offered by the longer period, and possibly accelerating a significant income tax burden. Beneficiaries can breathe easier, as the GOP Act does not propose an abbreviated payout period.
What’s Next for Tax Reform
It’s highly unlikely that the GOP Act will pass into law without additional changes, but it could have significant impact for those concerned about estate tax and other tax issues related to transfer of assets. If you have concerns about how tax reform will affect your estate plan, contact your estate planning attorney, whom you can be sure is keeping a close eye on proposed changes to the law.
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