Estate Tax – June 2017

AALU - Leadership for Advanced Life Underwriting

Estate Tax – June 2017

What to Tell Your Clients about the Estate Tax

As we explained in our last client communication in November, it is very challenging to do 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 enter June, deadlines have slipped, and Republican leaders now acknowledge tax reform will be difficult to achieve before the end of the year.

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  • Even if repealed, the estate tax will come back with a change of control in Congress.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 requirement is 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 ten years after repeal.

Estate Tax Repeal Makes revenue Challenges Even More Difficult

Both President Trump and House Republicans have put forth proposals that would significantly reduce revenues to the government. The Tax Policy Center estimated that Trump’s overall campaign plan (which is very similar to his one-page proposal released last month) would reduce revenues by $6.2 trillion over 10 years, and the more conservative Tax Foundation estimated a revenue loss of $2.6 trillion to $3.9 trillion after accounting for greater economic growth. And this was without a 15% pass-through rate, which would likely add $2 trillion to long-term debt protections from these organizations.

Treasury Secretary Mnuchin says the tax cuts outlined by the Trump Administration will pay for themselves with economic growth. Yet it’s widely disputed by economists on the left and the right. For example, Douglas Holtz-Eakin, a former Director of the Congressional Budget Office and economic advisor in the George W. Bush Administration, cautioned against the assumption that tax cuts will pay for themselves, suggesting that if interest on the national debt continues to steadily increase it could cancel out the benefits of reducing taxes.

Repealing the estate tax costs $275 billion over 10 years, a costly contributor to the significant revenue challenges outlined above.

  • Some Republicans may prefer not to waste political and policy capital on an issue that largely has been “solved.” In fact, some trade groups – who in the past have supported repeal – no longer advocate in favor of repeal because current law has solved the estate tax issue for them.

The Congressional Calendar and Senate Environment Pose Additional Hurdles for Tax Reform

The Congressional calendar will continue to hamper Republicans in their quest for a quick passage of tax reform.

Health care reform is the biggest immediate hurdle, as it creates a procedural bind for Republicans. House leaders can’t move a FY 18 budget resolution to use for tax reform until health care has been enacted – because as soon as the FY 18 resolution is operative, the FY 17 resolution can no longer be used.

In addition to tacking health care and tax reform, Congress will need to raise the debt ceiling sometime this Fall, reauthorize funding for SCHIP and the FAA, and confirm a number of key unfilled cabinet positions.

These efforts will take place in a tense Senate environment, where the firing of FBI Director James Comey further strains party relations already roiled by the use of the nuclear option in the nomination of Neil Gorsuch to the Supreme Court.

Estate Tax Repeal is Not a Priority for Small Business or the American Public

  •  Currently estate tax speculation is confined to those most impacted by it. This will change if the issue is turned into a debate on the Senate floor and in the public view.
  •  A recent Wall Street Journal poll revealed that only 3% of small businesses see estate tax repeal as a high priority.
  •  A recent University of Maryland poll showed that 78% of voters support current estate tax law or lower exemptions/higher rates.
  • President Trump won the election in large part due to higher than expected support from working class voters in places like Wisconsin, Ohio, Pennsylvania, and Michigan.
  •  Repealing the estate tax is very regressive tax policy that benefits the wealthiest 0.2% of estates in the country. Such a move could be construed as politically ‘tone-deaf’ given the increasing amount of wealth inequality and drop in income for major parts of the “Trump Coalition.” Trump won in places like blue collar, Democratic Northampton County, A and lost in places like Greenwich, CT. In a remarkable turn-around for a Republican, Trump and Clinton essentially split voters earning less than $50,000 annually.

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