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Key Points in the Death Tax Repeal Act of 2017

Posted on: February 11th, 2017
death tax repealThe Death Tax Repeal Act of 2017 was introduced just a few days after the first of the year. The Act, originally filed as H.R. 198, sets forth repeal of federal estate taxes, as well as generation-skipping transfer (GST) taxes. In late January, another bill H.R. 631, was introduced to the House by Congresswoman Kristi Noem. This bill includes provisions for permanently setting the lifetime gift tax exemption (with an inflation adjustment) and a maximum gift tax rate of 35 percent. 

A few considerations to make with a potential death tax repeal ahead:
Effective date. While changes to tax planning efforts may be discussed now, if the Act is passed into law it will become effective immediately. The death tax repeal might at first appear to be a change that does not prompt urgent plan reviews, but without an interim period to gradually review and revise tax plans, other tax implications could immediately impact estates of decedents who die on or after the effective date.

Other tax implications. Per H.R. 631, certain distributions (non-exempt principal distributions) from qualified domestic trusts would remain taxable until 10 years after the decedent’s date of death (if the decedent dies after the Act passes into law). The legislation preserves the gift tax and indexes the exemption amount ($5,490,000 in 2017). The maximum gift tax rate would be reduced to 35%. On the same day H.R. 631 was introduced, Senator John Thune submitted legislation to the Senate. If enacted, this legislation would eliminate, in most cases, the effectiveness of Incomplete Non-Grantor Trusts, used by many to minimize state income tax. The potential change is included in a new IRC Section 2511(c) Treatment of Certain Transfers in Trust, stating that "a transfer in trust shall be treated as a taxable gift under Section 2503, unless the trust is treated as wholly owned by the donor or the donor's spouse.”

Capital gains tax implications. The Act does not include provisions for such; however, President Trump’s earlier proposal included a capital gains tax at death with an exemption of $5 million (or $10 million for married couples.)

The Joint Economic Committee published a Republican Staff Study in 2012 stating that historical data indicates the federal estate tax fosters long-term loss. Business interests exhausted by the federal estate tax might prompt the dissolution of the business, which has both a negative economic impact and loss of long-term earnings and tax revenue.

In addition to regular reviews, existing trust documents, estate and tax plans should be reviewed soon with regard to forthcoming possible changes. Subscribe to our tax law blog for new updates on estate, tax and related matters.
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