Yesterday, House Republicans unveiled their tax reform legislation, called the Tax Cuts and Jobs Act. (You can read the full text of the bill here.) Although the tax plan proposes numerous changes to our current system, we wanted to review a few that could impact your estate plan.
1. Repealing the Estate Tax
We have written previously about the history of the estate tax, but pretty soon the estate tax itself could be history. Under the GOP proposal, the individual estate tax exemption would nearly double (to about $11 million) immediately -- and the federal tax would be repealed entirely in 2024. What does this mean for you? Very likely, nothing. Only 0.2% of estates owe an estate tax. However, for those who do (or may) owe an estate tax, elimination of this 40% tax could mean a difference of thousands or even millions of dollars.
2. Maintaining "Stepped-Up" Basis
Republicans have long wanted to do away with the estate tax. However, some commentators believed that, as a compromise, the House bill would also propose eliminating (or limiting) a tax rule known as "stepped-up basis," which can allow you to avoid paying capital gains on certain inherited assets. Although the Republican tax plan maintains the stepped-up basis rule, it is an important item to watch in the coming months, as the rule can always be excluded in the Senate version of the bill. If the final tax package does eliminate the stepped-up basis, you should revisit your estate plan to determine how best to handle appreciated capital assets.
3. Extending "Pass-Through" Taxation
Some businesses -- sole proprietorships, partnerships, or limited liability companies -- pay taxes differently than others. For these "pass-through" entities, the owners pay taxes on all business profits on their individual tax returns (i.e., business income "passes-through" the business to the owner's tax returns). This is in contrast to a corporation (or a business that elects corporate-style taxation), which is taxed directly on all business profits.
Under the GOP tax plan, pass-through companies would pay a tax rate of only 25% on a large chunk of their business income (significantly lower than the 39.6% some pay now). The bill does include provisions to prevent service firms (e.g., law firms, accounting firms) from being able to pay the lower 25% rate; however, unless stronger (and likely more complicated) rules are proposed, many of those firms will likely still be able to qualify for the lower tax rate. Still, if you own a business, the tax plan's treatment of pass-through entities will be a major item of debate that you will want to watch.
The Bottom Line
With all the uncertainty surrounding tax reform, now is a good time to review your estate plan to see whether any of the potential changes to the tax system could affect you or your family. As always, we recommend discussing these matters with a qualified estate planning attorney or tax professional. To discuss creating or reviewing your estate plan, contact the experienced Oklahoma City estate planning attorneys at Postic & Bates today for a free, no-obligation consultation appointment.
[As with all our posts, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]