When President-elect Donald Trump first rolled out his much-anticipated tax plan as a Presidential candidate earlier this year, his plan to eliminate the federal estate tax (referred to as the “Death Tax” on his campaign website) caught the eye of many high-net-worth individuals and estate planners alike. The current gift and estate tax laws assess a tax of 40% on the fair market value of a decedent’s assets that exceed an exemption amount (currently, $5,450,000 per person for 2016). In its place, Trump suggests a law that, according to www.donaldjtrump.com, would “subject capital gains held until death and valued at over $10 million to tax.” It is unclear whether he meant that only capital gains in excess of $10 million would be subject to tax or whether a gross estate in excess of $10 million would be required to pay capital gains tax.
However, as is the case when any legislation is proposed, Trump’s administration will have to obtain approval from Congress in order to see his plan to eliminate the estate tax made reality. First, the Republican-controlled House of Representatives will consider the proposal through a series of committee hearings and floor debates, culminating in a final vote on the House floor. If the proposal is approved by more than half of the Representatives present, the House bill then moves to the Senate (of which the Republicans hold 51 of the 100 seats). The proposal is then put through a similar series of hearings and debates before it is brought to the Senate floor for final vote. Since the Senate operates under a self-imposed filibuster rule requiring 60 votes to act, the repeal of the estate tax will require not only virtually unanimous support within the Republican party, but also some Democratic support, which has historically been very difficult to obtain on this topic.
Interestingly, the Bush tax cuts of 2001 could not garner the 60 votes required in the Senate to make said cuts permanent. Congress instead resorted to the budget reconciliation processes to pass the tax cuts, which requires a simple majority in the Senate. However, under the Byrd Rule, any measures passed as part of a budget reconciliation that significantly increase the federal deficit beyond the term of the budget can be blocked. As a result, most of the provisions in the Bush tax cuts were required to sunset in 10 years. If history is any indication, Trump and the Republican Congress may be facing a similar road to navigate.
Perhaps the more likely scenario is that Trump’s desire to repeal the estate tax is lumped into a comprehensive tax reform bill that addresses many aspects of his tax action items (such as consolidating current income tax brackets, taxing carried interest as ordinary income, increasing the standard deduction, limiting itemized deductions, etc.) In order to gain the requisite Democratic support for such a tax reform bill to pass, certain concessions will likely need to be made. Furthermore, given that only $17 billion in estate taxes were collected in 2015 (which was less than 0.3% of 2015 total federal revenue of approximately $6.452 trillion), it is hard to predict how Congressional leaders will react. The estate tax repeal piece of an overall tax reform bill could very well end up being a feather in the wind of the negotiations.
Whatever the final outcome, it is clear that at the very least, a Trump presidency means intense scrutiny for the estate tax. Please contact us with questions on how Trump's tax plan might affect you and visit the Schneider Downs Estate Tax Planning Services page to learn about services that we can offer.