Estate tax repeal no 'slam dunk' under Trump and Republican-held Congress

If Republicans were to win a repeal of the so-called death tax, contentious Treasury regulations on business valuation discounts would also disappear

Nov 9, 2016 @ 1:41 pm

By Greg Iacurci

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As the U.S. begins to digest Donald Trump's presidential-election upset win over Hillary Clinton on Tuesday, all eyes turn now to how the president-elect will govern and what policies he may or may not be able to push through upon taking office.

Mr. Trump articulated several tax proposals as a candidate on the Republican ticket, focusing on a repeal of the estate tax, consolidation of income tax rates and lowering the top tax brackets, and standardization of tax rates across businesses.

At first blush, it may seem the real-estate mogul and reality-television star could successfully push through such tax reforms, given Republicans were able to retain a majority in both chambers of Congress.

However, Mr. Trump's desired reforms, especially a repeal of the estate tax, won't necessarily be a sure victory, experts say.

“It's not a slam dunk and on Jan. 20 he'll be able to repeal the estate tax. It's more complicated than that,” Richard Behrendt, director of estate planning at Annex Wealth Management, said.

Although the Senate was able to keep control of the Senate with 51 Republicans, that tally isn't enough of a majority to invoke cloture, or the closure of a debate on a particular question. To do so, Republicans would need to achieve a three-fifths vote in the Senate, or 60 total votes.

“Yes, he has the White House, the House and the Senate, but the big wild card is you need the 60-vote supermajority in the Senate,” Mr. Behrendt said.

The administration of George W. Bush, for example, couldn't push through an estate-tax repeal in 2006 due to a failure to overcome the 60-vote hurdle. The Republican-controlled Senate, in that circumstance, fell three votes shy, with a 57-41 vote in favor of repeal. The Senate also came up short on a similar measure in 2002.

“It's not as if the Republicans can do anything they want,” Charlie Douglas, partner and director of wealth planning at Cedar Rowe Partners, said.

A repeal of the federal estate tax, a 40% rate applied to estate values greater than $5.45 million, would also mean scrapping rules proposed by the Treasury Department on business valuation discounts.

That rule, which comes into force next year, would curb tax-planning strategies that lower the valuation of stakes in corporations or partnerships in order to lessen gift and estate tax.

“I think that becomes a moot point,” Mr. Behrendt said.

Mr. Trump has also proposed reducing the current seven income tax brackets, with a top rate of 39.6%, to three: 12%, 25% and 33%.

He would tax all corporations at 15%, which would be a boon to business owners who structure practices so revenue is reported on their personal income tax returns.

Tim Steffen, director of financial planning in the Private Wealth Management group at Robert W. Baird & Co., believes income-tax reform would be easier than an estate-tax overhaul for Mr. Trump and congressional Republicans.

'DIFFICULT TO PASS'

An estate-tax repeal would be “very difficult to pass,” he said, because it's not an easy political pill to swallow for Democrats, whose support would be needed to overcome the earlier-mentioned 60-vote barrier.

“It's difficult to justify to constituents, especially because we don't really have moderates anymore,” Mr. Steffen explained, saying Democrats would be seen as helping repeal a tax that only affects the ultra-wealthy.

Mr. Douglas thinks there's a “decent shot” at an estate tax repeal, but there will be “political horse trading” involved to get Democrats to the negotiating table.

For example, Hillary Clinton, the Democratic nominee for president, had proposed raising the estate tax and eliminating the step-up in basis at death. So, if an inherited asset had appreciated $500,000, the beneficiary would pay capital gains tax on the appreciation, in addition to estate tax.

If there were an elimination of the so-called death tax, Democrats may push for carryover basis, whereby capital gains tax isn't due on the $500,000 upon the asset owner's death, but when a beneficiary ultimately sells it later, Mr. Douglas said. Carryover basis factored into Mr. Trump's original tax proposal, he added.

“What it's going to come down to in the political football is, yes, we'll get tax reform, but it needs to be financially responsible tax reform,” Mr. Douglas said.

However, Democrats may feel "there's no point negotiating" since the federal estate tax doesn't affect many individuals anyway. In 2015, there were less than 5,000 taxable federal estate tax returns, which delivered roughly $17 billion in revenue to the government.

Financial planners and tax payers should keep in mind that the laws around estate taxes come and go, said John O. McManus, founding principal of McManus & Associates.

“Even if the federal estate tax evaporates under Trump, that is never permanent,” he said, pointing out that in 2010 the estate tax exemption was reduced to zero, only to have it set at $1 million for the following year.

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