On December 22, 2017, President Donald Trump signed the Tax Cut and Jobs Act (TCJA) into law, and thereby enacted the most sweeping tax reforms of the last 20 years. This new law provides tax relief on a number of fronts including a reduction in the corporate tax rates from 35 to 21% as well as offering estate and gift tax relief and even reductions in the capital gains rates. This article will serve as an overview focusing first on estate and gift tax changes AND also reviewing other tax relief and, finally, wrapping up with a brief look at potential Medicaid changes.
The History of the Federal Estate Tax Debate
In June of 2015, the U.S. Congress voted to repeal the Federal Estate Tax a/k/a the federal “Death Tax”. Given the powers that be at that time, that movement to repeal stopped at the House of Representatives.
Factors that led the House to Vote to Repeal the Death Tax…
The vote in the House to repeal the Death Tax was 240 to 179 vote and largely along partisan lines with a few stragglers crossing over as is usually the case. The argument put forth by the Republicans is that people in the U.S. are taxed every step of the way during lifetime and finally when its all over, Uncle Sam swoops in and consumes approximately 40% of a life’s work being held for children and grandchildren.
Republican Scrutiny of the Federal Estate Tax
The majority of Republicans oppose the federal estate tax on the grounds that it is a disaster waiting to happen for asset heavy small businesses that lack liquidity. Renaming this as the “death tax”, conservatives have held the position that this tax is fundamentally unjust because the deceased person paid income taxes for a lifetime on those assets AND having to pay yet another tax places in undue burden on family businesses and hinders business succession planning.
Opponents of the tax assert that the it is most detrimental to family farms and family business who did not have the “intel” to create sophisticated estate planning strategies to limit death tax exposure. They contend that the wealthiest Americans who have access to top professionals are usually well versed in a variety of advanced tax planning strategies.
Less sophisticated small business owners and investors may have less awareness of the consequences of the death tax and this can be a shocking surprise to heirs and beneficiaries.
Democrat Support of the Federal Estate Tax
In 2015, most Democrats contended that preserving the federal estate tax was necessary to curb the ever exploding deficits. Then President Obama threatened to veto the bill if it passed the Senate which ultimately was not a concern. Essentially, the Democrats defined this as another move to foster…”tax cuts for the rich” and characterized this an an attempt to “lilt the U.S. Tax Code in favor of large campaign donors.
Whatever your political persuasion, it seems obvious to me that both sides of the aisle tend to favor appealing to wealthy campaign donors. I also agree with the Republican view concerning the devastating consequences for “asset heavy” family businesses and farms, as these kinds of family businesses often aren’t “liquid” enough to cover a 40% estate tax that must typically be paid within 9 month of the owner’s date of death.
Federal Estate Tax Planning and Florida Estate Planning
Federal estate tax planning is an important component in your Florida estate planning and Florida business planning arsenal. If this important concern is left unattended, it could devastate your loved ones and your business at the most vulnerable time by forcing a liquidation of your family business.
However, there are many approaches to managing and even eliminating the federal estate tax such as utilizing irrevocable trusts in Florida or implementing Florida charitable estate planning strategies. The key is that any estate plan should offer 360 degrees of protection and federal estate tax planning is a key component.
3 Areas of Tax Reform in the Republican Tax Overhaul
The Republican tax plan decisively cut taxes, such as capital gains and corporate taxes, as well as reduced income taxes for the majority of Americans. The plan does this by expanding the child tax credit AND the standard deduction so that the first $24,000 of income for every household in America is not taxed.
The Impact of Republican Tax Reform on the Federal Estate Tax
Given the budget challenges related to a massive budget deficit, there was serious scrutiny about the possibility of an outright repeal of the estate tax. Rather than go that far, the Republicans opted to reduce the estate tax burden by essentially doubling the amounts that individuals and married couples may exempt from the tax. This change is echoed for the federal gift tax exemption which has been tracking along with the estate tax exemption.
The expansion of the exemption (a/k/a unified credit) will have a huge impact on estate planning in Florida and across the country AND will change the focus when doing estate planning with trusts and particularly using Florida living trusts for estate tax planning.
The Federal Estate and Gift Tax Updates for 2021
- Estate Tax Exemption Expanding to $11,700,000 for individuals
- Estate Tax Exemption Expanding to $23,400,000 for married couples.
- The Gift Tax and Generation Skipping Tax Exemptions also go up to $11,700,000 and $23,400,000, respectively per donor.
SNAP BACK PROVISION IN 2026
True to form, lawmakers included a SNAP BACK provision which means that in 2026, federal estate tax, as well as gift tax and generation skipping tax, rates go back to 2017 levels (adjusted for inflation). So, it will be very important for wealthy families to pay attention in the coming years and potentially utilize “gifting strategies” during the years when the increased exemption remain available. That said, if history repeats itself, lawmakers may likely extend the cuts on or prior to 2026.
Capital Gains and Corporate Tax Rate Reductions
A Reduction In Capital Gains Tax Rates Follows an Increase in These Rates By the Obama Administration.
In Forbes, the Federal Capital Gains Rate in the U.S. has been among the highest in the world at 23.8 percent (not including state rates), and President Obama had proposed that this rate should be increased to 28% as part of a 320 billion dollar tax hike. This Forbes article, pointed out that compared with many other countries in the civilized world, we are already less than competitive. It is against this backdrop that the new administration, backed by a Republican controlled House and Senate, addressed the capital gains rates as well as corporate tax rates.
The changes to capital gains were less dramatic than corporate tax rates. Short term capital gains are still taxed as ordinary income AND are thus based on the new tax brackets in the same way as income. Long term capital gains were reduced to 20% but this only applies to the top bracket, with 15% for the majority of households and 0% for lower income folks.
Much more dramatic and potentially a game changer for the U.S. economy is the cut in corporate tax rates from 35 to 21% as of January 1, 2018. Proponents of this cut contend that this will bring corporations back into the U.S. who’ve previously fled in lieu of seeking more favorable tax jurisdictions.
Potential Restructuring of Medicaid Planning
Last But Not Least, A Potential Restructuring of Medicaid Planning Under the Affordable Care Act Is Possible With the Potential Repeal of Obamacare.
If you’ve dealt with Medicaid planning in Florida or another state in recent years, you know that this entire arena has been “upended” by the requirements of Obamacare. As in many other sectors of the healthcare arena, Obamacare has added complexity and confusion to the Medicaid arena and it has often been up to the states to sift through the confusion.
For its part, the Republican tax overhaul did little to alter the existing Medicaid system, despite much speculation to the contrary. However, ongoing speculation continues and there has been some activity to allow states more flexibility to implement work (job training) programs as part of the Medicaid requirements.
During the campaign cycle, the concept was noted that the states know better how to care for their elderly populations and thus should have the discretion and autonomy to do just that under the Medicaid system.
Of course, because I do not claim to be able to predict the future, all of the above is a “best guess” based upon what is currently happening. So stay tuned, as we will of course, to get up to date summaries on the most important issues that impact your estate planning concerns. Moreover, as we pinpoint key changes in estate planning, estate tax planning, elder law and Medicaid planning, you’ll be the first to know.
Steve Gibbs, Esq.
This is an updated version of a prior post dated November 9, 2016., and revised on October 16, 2017.