Yesterday members of the Trump administration, Gary Cohn and Steven Mnuchin, outlined the broad strokes of President Trump’s tax proposal. Included in the proposal are plans to reduce the seven tax brackets currently in place to three, dramatically lower the tax rate for businesses, double the standard deduction, lower the capital gains tax, eliminate all individual deductions with exception to those relating to mortgage interest and charitable giving, and to eliminate the estate tax (aka the “death tax”).
Before diving in to how this might affect your estate plan I’ll note that this is not the first time a president has proposed eliminating the federal estate tax. In 2001, the estate tax was temporarily phased out and repealed with legislation that gradually reduced the estate tax completely in 2010. However, this change was short lived as congress retroactively reinstated the tax in late 2010 with an exemption of $5,000,000. See Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, tit. V., Pub. L.No. 111-312, sec. 302(a)(1)(Dec. 17, 2010). The 2010 law had a sunset clause, meaning that it would gradually phase out and return the estate tax to the 2001 exemption level of $675,000. However, on January 1, 2013, congress enacted the American Taxpayer Relief Act of 2012, making the $5,000,000 estate tax (adjusted annually for inflation) a permanent part of the Internal Revenue code.
The current federal estate tax exemption is $5,490,000. This means that if you die owning assets in excess of 5,490,000, you will pay a tax of 40% on the excess. If you live in Oregon, you also have to worry about the state estate tax, which imposes a tax on assets in excess of $1,000,000. However, unlike the federal estate tax, Oregon’s estate tax rate is much lower, with a maximum rate of 16%.
When it comes to your estate plan, our attorneys aim to reduce your tax liability at death by taking advantage of things like portability and the unlimited marital and charitable deductions. Because the federal estate tax is so high, very few individuals have to worry about incurring a federal estate tax at death. For the majority of our clients, an elimination of the federal estate tax will have no effect on their estate plan.
However, if you have an estate with a high-net-worth, you’ve likely set up a complex trust to avoid as much tax liability as possible. Such a trust may be overly cumbersome for your survivors to administer if they no loner have to worry about a federal estate tax, so you may want to simplify your trust. Alternatively, if the federal estate tax is eliminated, you may want to revise your trust to try and eliminate as much state tax as possible.
It is important to keep in mind that the president’s tax plan is just a proposal at this point. High-net-worth individuals shouldn’t rush to undo their estate plans, but should wait and see how the president’s plan plays out before making any drastic changes. If you have any questions about estate planning, or would like to talk to one of our estate planning attorneys, please click here or call (503) 206-6401 to schedule a consultation.