It is very challenging to implement major tax reform, which is why it hasn’t happened since 1986. Republicans began the year with an ambitious agenda that included enacting a major tax reform package—including estate tax repeal. The goal was to complete tax reform, in addition to repealing and replacing Obamacare, by the August recess.
Yet, as we approach the Memorial Day recess, deadlines have slipped, and Republican leaders now acknowledge tax reform will be difficult to achieve before the end of the year.
Republicans face significant challenges as they work to enact major tax reform—particularly a package with the ambitious objectives currently being discussed by House Republicans and the Trump Administration. It is advisable that clients make decisions based on the existing tax code. If the tax picture changes, strategies can be adjusted accordingly. There are many hard realities associated with tax reform.
Bottom-line: Anyone betting today’s insurability on tomorrow’s legislative deal may wish to think twice
What is Best for the Client?
At the heart of this issue is what is best for the client. That is central to AALU’s advocacy efforts. In the case of the estate tax, this involves asking the following question: should clients gamble with their insurability? Even if repealed, the estate tax will come back with a change of control in Congress. As a thought experiment, if the Democrats retake Congress after the 2018 or 2020 elections, then you can anticipate an immediate move to reinstate the estate tax. Given their position on the issue, Democrats are likely to support a lower exemption and higher rate than current law.
There has been a federal estate tax for 99 out of the last 100 years. The first federal tax was a stamp tax required for wills established by Congress in 1797. Between then and 1916, the federal government used other temporary taxes on inherited wealth to fund, largely, war efforts.
Democrats are not going to support current tax reform proposals being discussed in the House or from the Administration. While bipartisanship was always going to be difficult, Republicans have indicated that tax reform will be done on a partisan basis, and according to our conversations, Senate Democrats don’t support estate tax repeal regardless. This means passing tax reform will require a special Senate procedure called budget reconciliation, which comes with restrictions. A key constraint requirement that any bill must be revenue-neutral in the out years of the budget window—typically a 10-year period. One option to deal with this requirement is to sunset any tax bill—i.e. after ten years all the tax changes would disappear, reverting back to the previous tax regime. So, clients could find themselves in a situation with less insurability but the same estate tax liability 10 years after repeal.
Bottom line: if the estate tax is repealed, it will come back. Just a question of when.