If there’s anyone who should believe in repealing the estate tax, it’s one of America’s wealthiest individuals. Donald Trump, the new president-elect of the United States, is definitely one of those. While the estate tax didn’t come up much during the billionaire’s candidacy, Trump made a definitive statement on his website:
“The Trump Plan will repeal the death tax.”
Trump’s plan doesn’t state exactly how he intends to remove the estate tax entirely, nor when we can expect it to happen. We need to remember that the estate tax is a big source of funding for the government. Repealing it means that money must come from somewhere else. That’s why it’s entirely likely that the estate tax will get repealed — and then replaced with a different type of tax with a different name.
While the name might change, what probably won’t change is the fact that wealthier Americans are expected to give a significant portion of their wealth to the government. They’ll just be doing it under a different set of rules. But before we get into that, let’s look at Trump’s overall plan for taxes and how it’ll affect your estate.
Trump on Taxes
When it came to tax-related campaign promises, Trump took a reduce-and-simplify approach. He wanted to create three income tax brackets with three percentages charged: 10%, 20%, and 25%. Once he was elected and he started to solidify his plans as part of the transition, those amounts changed to 12%, 25%, and 33%. The chart below gives an at-a-glance look at this new tax bracket system:
| Single Income | Married Income | Tax Percentage |
| $0 to $37,499 | $0 to $74,999 | 12% |
| $37,500 to $112,299 | $75,000 to $224,999 | 25% |
| $112,500 + | $225,000 + | 33% |
Top earners, which generally include anyone who should worry about estate taxes, currently pay an income tax percentage of 39.6%. While Trump’s initial plan would have saved you more than 10%, his new revised one cuts those savings in half.
Already, wealthy Americans are seeing what you could have saved in taxes slide downward, and Trump isn’t even in office yet. So while Trump made a lot of promises to reduce taxes, political reality may make those reductions difficult. Don’t hang your hat on all those changes becoming law.
The same holds true with the estate tax repeal. Other Republican presidents and lawmakers have tried before to repeal estate tax laws. While they had some success, their effects were never permanent.
Why Is It So Hard to Repeal the Estate Tax?
It’s easy to see why most high-income Americans don’t like estate taxes. After all, it’s double taxation. You spend your entire life making money and paying taxes on that money, and when you die, you must pay taxes for that, too.
Even though the overall opinion of estate tax is generally poor, no one has ever been able to get rid of it for good. The reason for that is pretty simple: Estates don’t fight back. If the government tried to come in and seize 40% of the assets in your living room — assets you have already paid taxes on — you’d put up a fight, wouldn’t you? You’d take the government to court and have constitutional provisions that protect you from unfair taxation. But the constitution only provides these protections for the living. It says nothing about double taxing the dead.
Many justify the estate tax as a means of preventing one family line from becoming too powerful. The thought is that by passing down massive amounts of wealth from one generation to another, that one family line controls most of the wealth infinitely. This theory, though, has been disproven because unless the heirs who receive the money have the same business savvy of their benefactor, expenses and inflation would soon reduce the value of an estate to nothing.
On top of that, many people who are for estate taxes believe that the highest amount of taxation should be levied against those who need the money the least, which would include wealthy estates. The government needs revenue and that revenue has to come from somewhere. Democrats, historically, have been in favor of raising the estate tax, not repealing it. Republicans typically favor repeal.
Much of the problem with estate tax is that it impacts so few individuals, especially individual voters, that it isn’t often used as a platform in campaigning. Here’s a basic breakdown of 2015’s estimated estate taxes paid by estate value:
| Size of Estate | Number of Estates | Average Net Estate Tax |
| $5 million to $10 million | 2,298 | $1,928,999,000 |
| $10 million to $20 million | 1,150 | $3,349,538,000 |
| $20 million to $49.9 million | 540 | $4,062,621,000 |
| $50 million + | 266 | $7,392,722,000 |
Figures from 2015 IRS SOI Tax Stats
While nobody really seems to like it, there isn’t a lot of vocal support for ending the estate tax simply because of who it impacts. In his own campaign, Trump added his ideas for the estate tax under his overall tax plan, with his goal being to eliminate estate tax entirely and instead put the brunt of taxes collected from wealthy estates under capital gains tax laws.
Trump’s Plan for the Estate Tax
Trump’s plan for the estate tax would essentially eliminate it at a federal level and would make estates worth more than $10 million taxable at a capital gains level instead. In this case, any unrealized gains would be taxable at a 20% capital gains tax rate on the death of the original owner.
So, if you were holding an expensive property or item at the time of your death, it would be taxed based on its gains. Estates worth more than $10 million would see a change in the amount due as well as how that amount was calculated. Estates under $10 million would be entirely exempt.
There is something, though, that could be at risk under Trump’s plan and that’s the current ability to take tax write-offs for certain charitable deductions. Under Trump’s tax rules, the option to give appreciating assets to a private charity as a means of reducing overall estate tax would be disallowed, meaning that wealthier Americans would no longer have the same incentive for giving. In this new plan, itemized deductions would be reduced to $200,000 per married couple and $100,000 for single individuals.
While Trump’s plan might reduce or eliminate the estate tax for some families, there are some roadblocks that will need to be considered. After all, we’ve had many presidents try to eliminate the estate tax. Often, they’ve been unable to accomplish it because of a lack of support, even during times when the Senate had a conservative majority.
Roadblocks to Trump’s Estate Plan
Trump may have issued a definite statement regarding repealing the estate tax but doing so is not as simple as a campaign promise. Trump is going to need Senate approval to bring his plan of repealing the estate tax to fruition. This means he will need at least 60 votes in the Senate in support of the repeal. While the Senate is currently controlled by Republicans, it should be noted that Republican-controlled Senates in the past have refused an estate tax repeal.
Under the Bush administration in 2002 and 2006, Republicans controlled the Senate and it still fell short of the votes needed to repeal estate tax. This is because a Republican majority is not enough. A significant Republican majority is needed to pass an estate tax repeal because Democratic Senators are notoriously against removing the estate tax and historically have voted to keep or even raise this tax as a means of putting the highest burden of tax on wealthy individuals to provide funding for service programs to those with less wealth. Currently, Republicans hold 51 seats in the Senate, so even if every last Republican were to vote for the repeal, they would still need some Democratic support.
Without needed Democratic support, it’s unlikely that these tax laws will pass under the new administration. Because Democratic politicians are frequently in favor of the estate tax, it’s unlikely that they would support it. In addition, many of the politicians in the Senate will need to look at the public perception of them voting for repealing the estate tax. The fear of backlash from voters could be enough to prevent the new tax plan from gaining approval in the Senate.
The next thing to consider is time. First, it will take a while for any estate tax repeal to go through, even if Trump can garner the needed support for such a repeal. Next, there’s no guarantee that the estate tax would be gone for good. After all, in 2010, the estate tax disappeared only to reappear in 2011.
So, the estate tax may disappear but then come back even stronger in the following years. That’s the issue with estate tax laws. They’ve been around in some form since 1916. Despite numerous Republican administrations, no administration has been able to get rid of the estate tax entirely. While Trump’s plan might give some wealthier individuals optimism, that optimism should be guarded. A Trump administration does not create a slam dunk on the estate tax at the federal level, and its effects at the state level would be indirect at best.
What About State Estate Tax?
State inheritance and state-level estate taxes will not see any direct change under the Trump presidency. As it stands right now, 14 states along with the District of Columbia implement an estate tax. Six states implement an inheritance tax. Maryland and New Jersey have an estate tax and an inheritance tax. Trump has no power to repeal estate or inheritance taxes at a state level. While states frequently reconsider their own estate tax when the federal government makes changes, not all immediately do away with it.
It’s important to note that estate taxes provide a lot of revenue at a state level. In Oregon alone, the state estate taxes garnered an additional $280 million of revenue over a two-year period. For many states, the main reason to repeal estate taxes isn’t due to changes in federal law, but instead is due to the concern that wealthier residents will move out of the state to avoid estate taxes.
For example, New Jersey just significantly increased their estate tax threshold to prevent higher-income residents from moving out of state. This wasn’t done in reaction to Trump’s changes but simply due to the risk of losing high-paying, living taxpayers.
State-level estate taxes won’t change unless the state determines that it stands to lose more than it gains by residents moving out of the state. If populations of wealthier citizens remain high, it’s unlikely that states will repeal their individual estate taxes regardless of what happens at the federal level. As such, it’s still important to plan for estate taxes if you’re in a state that currently levies them.
How You Should Handle Estate Tax Planning
Under Trump, it’s possible that federal estate tax will be repealed, but at that point, wealthier individuals would need to consider the cost of capital gains taxes instead because taxes would still be levied on any gains made in wealthier estates. In addition, the state-level estate tax will still apply and wealthier individuals may lose out on valuable charitable deductions.
Even if these changes go through, it will likely be quite a while before we see it impact any estates. Keep in mind these laws will only change with a majority vote from the Senate, which is not a solid guarantee. It’s possible that the estate tax will remain the same in the coming years if the Republican majority can’t gain enough support.
Even if the estate tax does change now, different administrations can bring it back or even make it more burdensome in the future, like what happened in 2011. So it will still be important to leverage life insurance trusts for wealth preservation — to reduce the risk of losing a significant portion of estate assets to taxes. After all, if the money form the life insurance policies is good enough for Uncle Sam, it’s certainly good enough for your family and favorite charities. This is true regardless of whether those taxes come in the form of capital gains or standard estate tax.
The key to this is offsetting estate tax expenses and reducing estate value by leveraging life insurance trusts funded through universal life insurance policies. At Howard Kaye, we use a wide range of insurance strategies in conjunction with trusts to help our clients plan around taxes levied against estates. Here are a few benefits of using an irrevocable life insurance trust (ILIT):
- ILIT proceeds are not considered capital gains because insurance is not an investment, so life insurance trusts would not be impacted by any change of estate tax structure.
- ILITs are irrevocable and policies are bought and owned by the trust, meaning that these policies will not be considered part of your estate.
- These trusts allow individuals to create a pool of funding outside of their estate to settle capital gains taxes on highly appreciating investments like stocks and real estate.
- The trusts are also protected from creditors due to spendthrift provisions.
- Life insurance policies can be funded by using your annual gift tax excluded amount of $15,000 per person, allowing you to avoid any current tax consequences as well.
At Howard Kaye, we’re recommending that our clients continue their estate planning and wealth preservation strategies as-is in light of the new Trump administration. One thing that won’t change under Trump is that ILITs will remain a safe haven for assets that you’d like to pass on to your family.
Universal life insurance policies offer an opportunity to gain a greater return on a premium, especially during times of volatile market activity with an attractive after-tax internal rate of return at death. These policies remain a market-risk-free option during economic uncertainty. Let us prepare an internal rate of return analysis for you so that the benefits of using life insurance for estate planning become more clear.
If you haven’t created an estate tax strategy yet, now is a good time to start. There’s no telling if Trump will be able to get the estate tax repealed and even if he does, it’s likely that estates will face capital gains tax burdens instead. This means that an ILIT is still the best option for those who want to give their money to their heirs and not the government. For more information on updating your estate plan under Trump’s new administration, contact a Howard Kaye advisor today by calling 800-DIE-RICH.
