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CPAs' Role Grows After Estate Tax Repeal

mug martin shenkmanDonald Trump won the Presidency and the Republicans control both the House and Senate. Republicans have long wanted to abolish the estate tax, or as they have labeled it the “death tax.” President Trump included in his pre-election platform abolishing the estate tax. Regardless of the outcome of this proposal practitioners need to consider how a repeal of the estate tax, and other possible outcomes, might affect their clients. The practical reality is that the federal estate tax has not affected many clients for years since the exemption was raised to a $5 million inflation adjusted level. However, regardless of the outcome of the efforts to repeal the estate tax, estate planning will affect all clients. Regardless of the tax implications to any client, the role CPAs play in the estate planning process should continue to grow, not decline. Following are points to consider about the possibility of repeal and the continued role CPAs can serve.

Repeal of Estate Tax

If the estate tax is repealed practitioners should guide clients to review the entirety of their estate plans. This includes title (ownership) of assets, wills, trusts, insurance coverage and more. Most estate plans, even for smaller estates, may be based on tax oriented planning and clauses. Many clients (perhaps most) have not updated their wills and estate plans in many years and those plans may be based on the assumption of a federal estate tax, and in fact a much lower exemption that exists now. So repeal could only serve to exacerbate how disjointed their plan might be. For example, many wills (or revocable trusts if that is the primary document) mandate funding a credit shelter (bypass) trust to avoid estate tax. That entire planning construct might become irrelevant. If CPAs don’t proactively engage clients many will assume “Gee there is no estate tax I don’t have to do anything.” For many clients the specific manner in which their will is worded could result in that assumption being correct, or devastatingly wrong.

 

Example 1
A husband and wife are in a second marriage and both have children
from prior marriages. The husband’s will provides that the largest amount that
won’t create an estate tax should pass to a credit shelter trust that benefits his
current spouse and former children. When the husband’s will was signed the
estate tax exemption was $1 million so that amount would have passed to this
family trust and the balance to a martial trust (or outright marital disposition).
If the estate tax is repealed the entire estate would pass to this family trust
likely creating more contention between the current wife and children.

 

 

Example 2
Given the same facts as above, except the husband’s will provides
that the amount up to the estate tax exemption should pass to a credit shelter
trust that will benefit his current spouse and former children. When the husband’s
will was signed the estate tax exemption was $1 million so that amount
would have passed to this family trust and the balance to a martial trust (or
outright marital disposition). If the estate tax is repealed the exemption is zero
and the entire estate would pass to the marital trust cutting out his children.
The reality is that the practitioner and/or the client’s attorney must review the
exact language in the client’s current will or revocable trust, and the title to
assets. If the CPA practitioner is not comfortable evaluating these nuances (in
many cases only the paragraph in the will setting forth the funding allocation
between trusts) the client can and should be encouraged to consult with his or
her estate planning attorney.

 

Repeal of Gift Tax - Forms 709

If the estate tax is repealed that does not necessarily mean that the gift tax will be repealed. Historically, the gift tax has served as a backstop to both the gift and estate tax. If the estate tax is repealed, the gift tax’s role as a backstop to the estate tax is obviated. However, the gift tax may still serve an important purpose to backstop the income tax. Without a gift tax a taxpayer could transfer highly appreciated assets to anyone with net operating loss, a non-resident alien not subject to US income tax, heirs in lower brackets, etc. and have them consummate a sale. So the gift tax may remain. However, retaining the gift tax will retain significant complexity of the transfer tax system and will affect very few taxpayers. So it is possible that the gift tax will be eliminated or retained. If the gift tax is retained then anytime a client makes a transfer that does not meet the present interest requirements, or which exceeds the annual exclusion ($14,000 in 2017), a gift tax return will be required as under current law. Without any estate tax, and such a high gift tax exemption, that filing requirement will be absurd for most clients.

 

Example 3
Jane and Tom Smith have an estate worth $4 million. Their daughter
Cindy was recently married and is buying a house. They gift her $75,000
for the down payment. Since the gift exceeds the $14,000 gift tax exemption
(or $28,000 if the gifts are split between Jane and Tom and Cindy) a gift
tax must be filed. The aggregate estate is so far below the estate tax exemption
for one taxpayer ($5,490,000 in 2017) that the likelihood of a federal
estate tax might be insignificant. Does the CPA prepare a gift tax return as
required? The law requires it. Would any client in Jane and Tom’s situation
be willing to pay a CPA to file a gift tax return? It is highly unlikely. Perhaps
the practical answer is for practitioners to add a paragraph on gift tax filing
requirements to the general 1040 questionnaire or other communications
explaining these requirements and leaving it in the client’s hands to make
the decision. It would not be surprising to find that the gift tax is retained
and the outdated filing requirements illustrated above to remain.

 

Insurance

If the estate tax is repealed practitioners should make an effort to educate clients that existing life insurance and insurance plans (e.g., a life insurance trust) should not automatically be terminated. Life insurance for many clients will retain valuable investment benefits (tax deferred, additional diversification, etc.). For many clients life insurance may prove a valuable planning tool for aging. Clients may have purchased life insurance to pay an estate tax. But with increasing longevity the clients may well live into their 90s or beyond and end up spending down most of their estate for living expenses, health care, nursing homes, etc. What the client initially anticipated, a large inheritance to their children and insurance to cover the estate tax, may now more realistically be longevity, not estate tax, reducing their estate. The life insurance may prove to be essential to their initial plan, but for a very different reason. Even if life insurance is determined no longer to be relevant, practitioners should educate clients to not merely cancel the policy for its cash value (in the case of a permanent policy) but rather to have an insurance expert evaluate the policy and recommend options. A policy may be sold into the secondary market for much more than cash value. It may be possible to convert the policy into a different type of policy or annuity to thereby repurpose it into something more appropriate to fit the current environment. Too often clients simply react instead of plan.

Forms 1041

Before completing any Form 1041 practitioners should evaluate the trust with the client to determine if it still serves its intended purpose without an estate tax. Even without an estate tax many, perhaps most, trusts will remain viable to protect assets from claimants, divorce, and more. However, the clients may no longer understand the relevance of that trust. If a trust in its present form is no longer optimal, it may be possible to decant (merge) the trust into a new trust that better serves current purposes. It may also be possible, depending on the terms of state law and the trust instrument, to have the beneficiaries and grantor agree by contract to a non-judicial modification of the trust. While it might be costly, if the other options are not viable, in some instances seeking court reformation of a trust might be worthwhile. In some instances the application of a trust might be modified by changing the nature of the assets or distributions to better conform to the new environment.

Non-Tax Planning

Estate planning never should have been entirely about tax issues. The repeal of the estate tax does not in any manner affect the importance of non-tax planning. Practitioners should guide clients to refocus planning to a range of vital issues, further discussion of which is beyond the scope of this article: planning for aging, asset protection planning, divorce planning and much more.

Conclusion

Whatever happens with estate tax repeal, the role of the practitioner will remain vital to planning. Clients will likely not understand the many nuances of planning and presume that if the estate tax is repealed they need to do nothing. That may be a dangerous mistake in terms of their family and planning.


Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.