Section 2704 Proposed Changes: Much Ado About Nothing? A Different Kind and Level of Estate Taxation? A Golden Opportunity? All the Above?

Estate TaxesThe December 1 IRS hearings on proposed changes to the Section 2704 Regulations demonstrated the significant opposition from taxpayers, advocacy groups and other interested parties. Thousands of comments, almost all against the proposals, were submitted. A record crowd attended the five-hour hearing. No supporter (or just one depending on the reporting source) came forward.

The controversy includes limits to valuation discounts many see in the proposed regulations. Experts disagree on the extent and intent of these limits.

After the hearing, some believed the IRS would rework their proposals. Others thought it may be moot.

As part of his sweeping tax plan, President-elect Trump calls for the elimination of estate taxes. Most presume this would include gift taxes. When/if this broad-reaching tax plan is passed depends on how many Senate Democrats Mr. Trump can persuade to join him to reach the 60 votes required. And where in his list of tax changes do estate taxes fall? Many times, we have seen proposed tax changes negotiated away.

Trump spoke of implementing a capital gains tax at death. Most agree stepped-up asset values would remain. The Tax Foundation thinks otherwise. They read into Trump’s proposal that estates over $10 million would effectively lose their stepped-up basis. They further believe the capital gains tax would be deferred until the inheritor disposed of the asset. (Interestingly, the Tax Foundation projects a repeal of estate taxes would lower federal government revenues by $240 billion between 2016 and 2025 and would have a positive 0.9% effect on GDP over the same period).

A capital-gains-at-death tax could mean an effective tax of 20%. It’s uncertain if the federal exemption would continue. In 2017, that exemption rises to $5.49 million ($10.98 million for a married couple).

Estate planning professionals are understandably unsure how to proceed. Many unknowns are in play.

One strategy is certain: with no change, a new tax or a tax repeal, moving assets out of an estate remains beneficial.

  • If no change occurs, the benefits seen today remain.
  • If a new tax is enacted, the benefits diminish but will still exist.
  • If the tax is repealed, this becomes a golden time to move assets, potentially federal tax free.

The biggest uncertainty: What happens when Democrats regain control?