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Planning While Rooting For Repeal

by By Mitchell M. Gaswirth

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Los Angeles, CA 90067-3206
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The surprising to many result of the recent U.S. Presidential election raises for the first time in years the real prospect for repeal of the U.S. gift, estate and generation-skipping transfer taxes. While the gift tax might have to remain in place to “protect” certain aspects of the income tax regime, many of our clients would conclude “two out three ain’t bad”.

So that’s the end of the need for inter-generational wealth transfer tax planning, right? Hardly. Planning, planning, how do I love thee? Let me count the ways.

First, talk is cheap, and it doesn’t get more valuable with volume. The new Administration will hit the ground racing come January 20th, and there’s only so many bullet trains that can traverse any given set of tracks. Corporate tax reform (thought to be Mission Critical to job creation and, um, to making America great again), repatriation of hundreds of billions of dollars or more of accumulated offshore earnings (intended at least in part to pay for promised infrastructure projects), and individual income tax reform (obvious widespread appeal) are of far greater importance than estate tax repeal, both to the new Administration, and to the Nation. And those are only the chief “tax reform” measures with priority on the legislative calendar. Many and equally if not more major non-tax priorities, like immigration reform, health care, a Supreme Court nomination, and the like, are expected to occupy some major component of the collective conscious. Estate tax repeal is not the stickiest of wheels, and it may not get early grease.

Second, even if repeal is included in the early Agenda, just how hard can the party in power be expected to push the issue? It’s a sociological minefield, a hot button for opponents, and an issue impacting less than two percent of the populace. And given the potential personal financial value of repeal to the Family of the new President with a host of other glaringly public economic conflicts of interest, this might not be the particular rock he chooses to try to push up a steep hill. When the compromises are struck, when the horses get traded, backing off estate tax repeal might be an easy give in exchange for some things of greater value.

Third, and in that very vein, “repeal” could potentially morph into “reform”, whether in the form of lower rates, larger exemptions, or both. Reform might give the new Administration a sufficient fanfare to blow without risking the self-inflicted wounds that could arise from crossing swords with a fierce cornered adversary on a seemingly minor issue.

And fourth, of course, even if repeal does in fact occur, unlike diamonds, is that forever? Would repeal come with a money-back guarantee that federal wealth transfer taxation elimination is permanent? Would the advocates for having our clients’ paying their “fair share” recede into the woodwork, never to be heard from again? Guess again. Most clients affected negatively by wealth transfer taxation in the long-term– which is anyone under, say, 85 — might be foolhardy to wager that during their lifetimes such taxation will not rise again like a confiscatory phoenix.

So what to do? What we always do – PLAN. Some make hay while the Sun shines, some will plan for inter-generational wealth transfer during such celestial benevolence. The wise among us will continue to plan while rooting for repeal. The risk-reward ratio seems compelling. Planning now can result in the efficient transfer of wealth, without taxation, to those upon whom our clients hope ultimately to bestow it. In many families, and in many circumstances, the lack of a wealth transfer tax will have little material impact on the ultimate destination of our clients’ financial legacies. If the tax is repealed in the near term, and then one day reappears down the road, it is highly unlikely to be retroactive. Wealth transferred successfully today may thus escape the jaws of taxation tomorrow.

And what exactly is the major “downside” if wealth transfers are made, and there is no tax in place at the wealth-creator’s death? In many family contexts the wealth shifted today can be used during its creator’s lifetime to fund for desired beneficiaries the largesse the creator would otherwise fund gladly during life. . . educations, homes, weddings, opportunities, you name it. Even in a zero-tax world such benefits could simply be funded from the planning vehicle established now to receive current wealth transfers.

Of course there is the age-old mantra to contend with — “what if I run out of money”? Quality planning should never expose a client to such a risk. More often the real (but usually unstated) questions are: “what if I just want it back”; or “what if my child marries yet another lower primate”? Quality planning can handle the latter issue. As to the former, quality planning, and future arms’-length transactions, can often provide an answer. In many circumstances the transferor may be able to regain access to at least portions of previously transferred wealth by simply delivering an interest bearing promissory note.

Yes, the prospect for repeal is now real. It does not, however, confer upon our clients a permanent get-out-of-tax-free card. Maximize the chance that your wealth will be nestled warm, comfortably and permanently in the pockets of the objects of your bounty. Certainly you may root for estate tax repeal, but you should not turn your back on the opportunity to plan for either its failure to materialize fully, or its subsequent evaporation.

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