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Major estate-planning implications in U.S. tax reform proposals
6/20/2018 7:08:00 AM
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Estate Planning
Insight on estate planning from one of Canada’s leading experts on estate law.

By Margaret O'Sullivan  | Monday, May 15, 2017


On April 26, 2017, with great fanfare, the White House announced bold proposals for tax reform, the primary objective of which is to stimulate economic growth. These reforms could be a real game-changer if they succeed in creating new jobs, fueling economic expansion, and making the U.S. more competitive – and dare I say it…making America great again.

In a nutshell, the Trump Administration principles for tax reform would among other things:

* Reduce tax brackets from seven to three.
* Set rates at 10%, 25%, and 35%.
* Repeal the estate tax.
* Set the top tax rate at 20% for capital gains and qualified dividends.

No doubt, the White House has made tax reform a centerpiece and top priority. Key policy issues and concerns abound as to whether lost tax revenue will create gaping budgetary deficits, and as to who will really benefit from these reforms – will it be the wealthiest and top earners at the expense of middle earners who will shoulder future deficits and federal debt?

Corporate rates at 15% would switch the U.S. from having some of the highest tax rates of any OECD country to having some of the lowest and in the ballpark of Ireland at 12.5%, one of the most competitive countries in the world, whose GDP in the last quarter of 2016 grew at an enviable rate of 7.2%.

What remains to be seen is whether the economic growth that results from these steep tax cuts will be enough to finance their costs.

The U.S. estate tax was originally introduced to promote greater economic intergenerational equality, nation-building, and social cohesion by limiting the ability to pass on inherited wealth. Its repeal would benefit the very wealthiest. The high present exemption level means the tax only applies to a person who in 2017 has a worldwide wealth of over US$5.49 million and for a married couple over US$10.98 million. As a result, very few pay estate tax, only about two individuals per 1,000.

The Trump campaign proposal was to replace the estate tax with a capital gains regime on death. It is not clear under the new proposals whether the estate tax would be replaced by a different form of tax.

It is startling to think that these proposals could make the U.S. a preeminent tax haven for many.

The repeal of the estate tax would certainly help to minimize tax exposure and complexity in estate planning in owning a U.S. vacation home or other U.S. situs assets, including U.S. securities. Those who have a U.S. spouse, child, or other U.S. beneficiary would no longer have to be concerned about exposing the wealth they pass on to a 40% tax at the beneficiary level.

And the proposal of a top tax rate of 35% might be attractive for those who have the ability to become a U.S. tax resident, in comparison to the top effective Canadian tax rate of over 53% in several Canadian provinces.

What the future holds, how tax reform in the U.S. will roll out, and the exact details are unknown and remain to be seen. But what is known is that the U.S. is now embarking on the biggest tax reform of a generation – pure and simple...or maybe not?

Margaret O’Sullivan is the principal of the Toronto-based trusts and estates law firm O’Sullivan Estate Lawyers. She practices exclusively in the areas of estate planning, estate litigation, advising executors, trustees and beneficiaries, and administration of trusts and estates. This article originally appeared in the O’Sullivan Estate Lawyers blog. Reprinted with permission.

Notes and Disclaimer

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. It is not intended to provide specific personalized advice on any individual situation, including, without limitation, investment, financial, legal, accounting or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your particular circumstances.

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