President Trump and members of Congress advocate for repealing the estate tax, but a new capital gains tax could replace it. The right guidance and a flexible estate plan will help you navigate the uncertainties of this potential reform.

A repeal of the estate tax would impact the federal debt (and the federal deficits that increase this debt), so part of the political negotiation process will be identifying a new revenue source. Globally, there is precedent for this kind of reform. When eliminating estate taxes, countries typically take one of three approaches.

1

Take no further action.

A few jurisdictions that generally have low taxes anyway, such as Hong Kong, abolished the estate tax without seeking any compensating capital gains tax or income tax.

2

Implement a carryover basis regime.

The majority adopt an alternative in which there is no step-up in the cost basis of the decedent's assets at death. Instead of receiving a new cost basis equal to current fair market value (as under a step-up basis), beneficiaries will inherit the cost basis and pay capital gains tax when they sell the assets.

3

Adopt the “deemed disposition at death" regime.

Under this option, capital gains tax is assessed on the increase in market value over the cost basis of the assets before they pass to the heirs. This approach has been proposed by both President Obama and President Trump for implementation in the U.S.

“There's an emerging global trend away from estate taxation, and the experiences of countries that have already made the transition can provide some insight into where things may be headed in the U.S.”
Regardless of what path is taken, a well-crafted wealth plan is still important
Plan around the uncertainty of the estate tax

Even if the estate tax is replaced, certain wealth planning techniques will still be valuable—especially if the gift tax remains. Continue to implement grantor retained annuity trusts and sales to intentionally defective grantor trusts, and make gifts up to the gift tax exemption.

Build flexibility into plans

Because there is no certainty to the timing or details of the tax changes, it's important to have some flexibility in your estate plan for the future. Naming a trust protector for an irrevocable trust is one way to address this, as that individual can make limited changes to the trust that would be beneficial from a tax perspective.

Look beyond the tax considerations

Wealth planning also incorporates many non-tax benefits, such as asset protection, probate avoidance, business succession and asset management advantages. Governance around how to preserve a family's assets cannot be forgotten. Empowering the next generation to successfully manage assets should be an ongoing focus for every family and incorporated as part of any estate plan.

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    The information provided is for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2017 The Bank of New York Mellon Corporation. All rights reserved.