Estate Planning KC: Trump won — now what? How the repeal of the death tax impacts you

Will a Trump presidency impact your estate? While not covered in depth during this election cycle, the fate of the estate tax, or “death” tax was contemplated in both candidates’ economic platform. Each candidate presented vastly different views on how to handle the death tax. Now that we know which economic platform is to be set in motion, we’ll look at how estate plans in Kansas City may be impacted by the Trump Presidency.

Elimination of the Death Tax
Donald Trump initially proposed eliminating the estate tax (or death tax as his team refers to it) in its entirety. While this may sound appealing on principle, the reality is that with the estate tax exemption currently set at $5.45 million per individual (or $10.9 million per couple), most estates are not subject to estate taxes. According to IRS records, just under 5,000 estates even paid estate taxes in 2015. When compared to the likely overall mortality rate of over 2.5 million, we can see the minimal impact of the estate tax repeal to the overall population. The change may have significant benefit to high net worth estates, though.

One wrinkle does exist as to whether the state of Kansas will follow suit. The state of Kansas currently is “tied” to the Federal threshold for determining whether an estate is subject to taxation on the state level. If the estate is under the federal threshold, then no tax is likely to be due. If Kansas continues this practice then the death tax, as we know it, may die for Kansans. Maybe not a bad thing.

Creation of a Capital Gains Tax
While Donald Trump’s tax plan calls for the repeal of the death tax, it instead creates a capital gains tax on any assets in the estate. Depending upon how his plan actually goes into effect, it may mean the elimination of the step-up in basis that normally occurs at death. Today, the step-up in basis allows the value of an appreciated asset to be calculated using the value at death instead of the value of purchase. Here is an example of how the step-up works.

Let’s say that your rich aunt purchased 5,000 shares of Cerner stock back in December of 1996 when the stock was trading around $2.00 per share and Cerner is trading at around $50 today. Using $50 as the sale price (and ignoring any stock splits) here is how the capital gains tax plays out both with the step-up in basis rule and without:

As the example shows, the imposition of the capital gains tax may have significant impact on appreciated assets. To offset this impact, the Trump plan appears to call for an exemption of the first $10 million dollars in asset value. If this is the case, then the estate tax scenario for the bulk of the population may not change. Even if there is no exemption, his representatives have indicated that Trump intends to provide an exemption for small family businesses and farms.

Impact of the Trump Tax Plan

While the elimination of the death tax will make certain aspects of estate planning easier, other aspects will become more complex. For instance, the Trump plan will require heirs to track the basis of received assets in order to report the capital gain if and when such assets are sold. This may be difficult if the asset was purchased a long ago and held over an extended period of time. Estate plans will need to look more closely at the nature of the asset and whether action should be taken during your lifetime to mitigate potential capital gains tax. Also, you may want to look at your retirement account balances to determine if opportunities exist to take advantage of certain tax benefits that may exist, especially for qualified Roth accounts.

We are still early in the process and time will tell as to what the changes actually look like. Most people are taking a wait and see approach while being ready to act once changes begin to take place after Jan. 20.

This Sponsored Column is written by Todd Rasmussen of Estate Planning KC. Rasmussen is an attorney and certified public accountant with offices in Overland Park. His firm, Estate Planning Kansas City, helps clients with their estate planning and business needs. This article is intended for informational purposes only and is not intended to render legal advice. The choice of a lawyer is an important decision and should not be made solely on the basis of this article.