No one can predict the future, but it appears likely that we’ll see some major changes the federal estate tax law following President-elect Trump’s inauguration on January 20th. A repeal of the federal estate tax has been discussed, along with what I’ll call an alternative system whereby certain unrealized capital gains are taxed at death. Another possibility (especially if the federal estate tax were to be repealed) would be a renewal of the “carryover cost basis” rules that were temporarily in place in 2010, or in other words, no more step-up in basis at death. While it is good to be prepared for anticipated revisions in the laws, I would not suggest making any changes to your estate plan for estate tax planning purposes until we know for sure what legislation may get passed and/or repealed later in 2017.

What we do know at this point is that the federal estate tax will only impact less than 1% of the population. And for those of us who are residents of Tennessee, the federal estate and gift taxes are our only considerations given that Tennessee repealed its state gift and inheritance taxes effective January 1, 2016. So back to the federal “death” taxes. For 2017, the applicable lifetime exclusion amount has increased from $5.45 million for individuals who passed away in 2016 to $5.49 million for those who pass away in 2017. The maximum estate and gift tax rate remains unchanged at 40% and the 2017 annual gift tax exclusion amounts will remain the same as 2016 at $14,000 per year per donee. Given the results of last year’s election (and without predicting the future) I would be shocked if we saw any increase in the federal estate and gift tax rate or any decrease in any of the federal estate or gift tax exclusion amounts, so don’t go gifting away assets during 2017. Many individuals who do make lifetime gifts lose one of the largest tax benefits, the “step-up” in basis of a decedent’s assets on the date of death.

And even though the federal estate and gift taxes only effect around 1% of the population, there are other tax (income tax) planning opportunities out there. One example for individuals with traditional IRA’s who have sufficient funds from other sources to provide for daily living expenses would be to consider a “qualified charitable distribution” (QCD) in lieu of all or part of an individual’s required minimum distribution. For example, if an individual is required to take a $5,000 required minimum distribution from their traditional IRA in 2017 and takes that distribution, then donates all or part of those funds to a qualified charity, the individual will likely report $5,000 as a taxable distribution and, if they itemize deductions, take a $5,000 charitable deduction. But a lot of individuals in this situation may not itemize (many don’t have mortgage interest, having paid off their homes long ago), so they lose the benefit of the charitable deduction. By making a QCD directly from the IRA to the qualified charity (and not accepting the funds themselves), the distribution is generally not included in their adjusted gross income regardless of whether they itemize deductions or not and the distribution can be used to satisfy all or part of the RMD. So even though your estate may not be in the multi-million dollar range to necessitate estate tax planning, you may benefit from a meeting to review both your general estate planning and income tax planning related to your estate. And we all need to keep an eye on the new administration taking office later this month and what changes may be made later this year that could impact all estate plans!

If you would like to speak with Kevin Dean on your estate/income tax planning or any other matter, he may be reached at 865-546-9321.