02 Jan Tax Planning as a Result of Trump’s Election
The election of Donald Trump and the control of both the House and Senate by the Republican Party is likely to have a great impact on tax planning. As a result, planning strategies could change.
Higher Estate Tax Exemption
As of January 1, 2025, the federal estate tax exemption (no estate taxes) is $13,990,000. Texas has no state estate taxes (unlike some states). As a result, very few will be subject to estate tax especially since planning can be done in wills and trusts for married couples to double the limit or by a spousal portability election (where a surviving spouse can file an estate tax return within nine months of the death of their spouse to add the predeceased spouse’s estate tax exemption to their own). As a result, $27,980,000 could be passed without estate taxes under present law if proper action is taken on behalf of the married couple or surviving spouse. However, the Tax Cuts and Jobs Act that permitted this high of an exemption is supposed to sunset as of January 1, 2026 to be one-half of the current rate so the exemption would be $6,995,000). President-elect Trump has indicated he would prefer that no one pay estate taxes. Although relatively few pay estate taxes, it does generate some revenue. So, it is likely that, at the very least, Congress will keep the estate tax exemption limit at its current level adjusted for inflation. Of course, this could change in the future at the whim of politicians.
Previously, it was thought that Presidents Obama and Biden would reduce the estate tax limit so that more would be subject to estate tax limit. In neither case did that happen. However, the fear was great enough that many gifted away assets or created spousal limited access trusts or did other estate planning strategies to reduce their taxable estates. There should be pause in such strategies for many since the same would lead to loss of the ”step-up” in basis that permits no capital gains tax on appreciated assets controlled until the time of the decedent’s death. The donee of a gift made during life would take the basis of the donor and would be subject to capital gains tax when the donee sells the appreciated asset. However, in some cases (particularly with larger estates), there are gifts of appreciated assets often with the aid of tax-planning trusts.
Estate planning attorneys often create trusts within wills or trusts so that the step-up in basis can be maintained in addition to no estate tax at the decedent or the decedent’s spouse’s death.
Since “control” often determines who is taxed (whether it be income, capital gains or estate tax), many have previously created various irrevocable trusts whereby the trust or the beneficiary would be subject to the taxes instead of the one who made the transfer to reduce the size of his or her estate. As a result of the election, some might consider going to court to modify the trust or decanting. This could also result in a lower income tax rate since most irrevocable trusts are taxed at a higher tax rate at a lower level of income than the tax rate for an individual. Some might also convert traditional IRAs and 401ks to Roth IRAs since income tax rates will likely be lower the next four years.
Stay tuned. Planning often changes with politics.
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