About the New Tax Proposal
Republicans in the U.S. House released their new tax proposal yesterday. The full text of the document is available on the web. It’s 429 pages and proposes to simplify the tax code, repeal the alternate minimum tax, and reduce corporate taxes. Of course, this bill is a first draft and is in the early stages of the legislative process. It is fair to say that this version of the bill will not become law, though many of its proposals might. So, how will the new tax proposal impact you? Will it require a change to your estate planning? Do you need to change your will or trust?
Elimination of Estate and Generation-Skipping Transfer Taxes
As it relates to estate planning, the biggest proposal is to phase out the estate tax and the generation-skipping transfer (“GST”) tax. That sounds like a big deal, but is it? For most people, the answer is “no.” Here’s why:
Currently, although the estate and GST taxes apply to everyone, they do so in name only. Currently, every person gets to exclude the first $5.49 million from their estate for both taxes, which means that only 0.2% of estates are hit by the taxes. As these taxes get phased out and ultimately eliminated, virtually nothing will change for most families.
No Change to Step-Up in Basis, Maybe
One big question among estate planning lawyers has been whether the proposal would eliminate the step-up in basis. The step-up in basis can result in big capital gains tax savings to the next generation. Currently, the step-up in basis applies to any property to which the estate tax would apply (including the first $5.49 million in excluded assets). The current proposal does not change the step-up in basis. However, it is unclear what would happen to the step-up once the estate tax is phased out – if there is no estate tax anymore, how do we decide which property gets a step up?
No Change to Retirement Accounts
Another big question among estate planning lawyers was whether the proposal would change the current retirement plan structure. The Republicans were talking about a number of proposals to limit the usefulness of inherited retirement accounts, and were considering a serious drop in the cap on contributions to certain plans. However, in the new proposal, there appear to be no changes to any retirement plan laws, so everything seems to be intact on that front.
What to Do? Plan!
Regardless of whether the new proposal passes, all adults need to consider or reconsider their estate plans. And there’s no better time to do it than right now. For most folks, the new tax proposal doesn’t change anything, but that doesn’t mean you don’t need to plan.
If you are a parent, you need to consider a child protection trust. That’s especially true if your kids are under about 40 years old, or if any of them have an issue like an addiction problem.
If you are in a blended family, you need to consider getting a trust to resolve all the complicated inheritance problems that arise in blended families. Do nothing and you will disinherit one set of children.
And if you have “already done” your estate planning, it is time to reconsider whether your old plan is still a good one. If your plan was done before 2011 and involves a trust, it is likely hurting your family, rather than helping. If you have an AB trust, family partnership, family LLC, or other “old” approach to estate planning, you need to update to a current technique.
This all sounds very complicated, but the bottom line is this: if you are an adult and you haven’t talked to us in the past year or two, now is the time! Give Learned Lawyer a call today!