What a Trump Presidency May Mean for Your Business and Estate Plan

Both the incumbent Republican leadership and President-elect Trump have put a significant emphasis on tax reform. Donald Trump’s tax plan is similar to the Tax Reform Task Force Blueprint created by House Republicans in June 2016. Both plans would eliminate the alternative minimum tax, simplify and lower income tax brackets, repeal the estate tax, and reduce taxes on businesses. But implementing these proposals may not be very easy. Republicans do not have the 60 votes necessary in the Senate to stop a Democratic filibuster or to stop the legislation from being blocked in the budget reconciliation process. Both parties may work together for a bipartisan tax reform package. However, Republicans could also wait for the 2018 elections in hopes of increasing their majority in the Senate.
Trump’s tax plan would simplify and reduce rates on corporations. It would reduce the business tax rate from 35% to 15% and eliminate the corporate alternative minimum tax. But most of my clients’ businesses are organized as pass-through or disregarded entities. Therefore, changes in individual income tax rates, rather than corporate tax rates, would affect those business owners. President-elect Trump’s tax plan would reduce the current seven tax brackets to three brackets with tax rates of 12 percent, 25 percent, and 33 percent. It would also eliminate personal exemptions and increase the standard deduction to $30,000 for joint filers and $15,000 for single filer. Trump's plan would cap itemized deductions at $200,000 for tax payers who are married filing jointly and $100,000 for individual filers. It would also eliminate the 3.8 percent Obamacare tax on net investment income and the alternative minimum tax. Most analysts believe that the Trump plan would lower income taxes for most people, but not everyone. It would likely be unfavorable for married couples with more than two dependents and for single taxpayers with more than one dependent. But the plan also includes an expanded deduction for child care expenses. So that may offset the lost personal exemptions for some families.
I have written before about the proposed changes to section 2704, which would affect discounted gifts of closely held businesses. We previously thought that these new rules could become effective as early as January. However, the political landscape has changed. There is now a strong sentiment that the proposed regulations will not be implemented anytime soon. At a hearing on the proposed regulations held on December 1, 2016, only one of the 36 speakers supported the proposed regulations. This was the largest crowd ever to attend a Treasury public hearing.  Congressman Warren Davidson (R-OH) and Senator Marco Rubio (R-FL) have also introduced bicameral legislation called the Protect Family Farms and Businesses Act, which would nullify the rules. Discounting is still a viable planning tool for now.

Estate tax repeal has long been a Republican priority. Chances of success are probably greater now than ever. At the current exemption levels ($5.49 million per individual in 2017), the estate tax affects very few people. About 99.8 percent of Americans will never pay estate taxes.  Full estate tax repeal would just extend the current trend to the remaining 0.2 percent. Given that some current Democratic senators have voted for estate tax repeal in the past, there is a possibility that estate tax repeal will pass in 2017.   
If this plan passes, there will be a strong incentive to keep taxable estates in the family and postpone capital gains as long as possible through the use of dynasty trusts. These are trusts that are designed to remain in existence for several generations without incurring transfer taxes, such as estate, gift or generation skipping transfer taxes. The use of dynasty trusts is limited by the Rule Against Perpetuities. This is a centuries-old rule that requires every trust to terminate within a prescribed time frame. North Carolina has modified the common law Rule Against Perpetuities. The N.C. Court of Appeals, in Brown Bros. Harriman Trust Co. v. Benson, has approved the use of dynasty trusts in North Carolina. The Court said that a trust “may remain valid in perpetuity” as long as it complies with certain statutory requirements. So N.C. residents would be able to use dynasty trusts to avoid taxes.
A bigger issue for most people is the step up in basis. When the estate tax was repealed briefly in 2010, so was the step up in basis. The Trump plan would eliminate a step up in basis on capital gains exceeding $10 million. Contributions of appreciated assets into private charities established by the decedent or their relatives would be disallowed. With the proposed capital gains tax rate of 20 percent, the tax on inherited assets over $10M would be considerably less than the 40 percent estate tax rate under current law. And because the capital gains tax would presumably only apply to appreciation, taxpayers would not be taxed on the full value of their gross estate.
At this point, we can only guess at what a Trump presidency means for estate and business planning.  Until the future becomes more clear, we have to continue to plan for uncertainty and flexibility. Basic planning for wills, trusts, powers of attorney and medical directives will not change. The probate process will not go away. You will still need to plan for minor children, businesses, out-of-state property, asset protection and second marriages. You will also need to ensure that your beneficiary designations are up-to-date and that you have carefully planned for your retirement benefits.