While it still remains to be seen which specific legislative policies the administration of President-elect Donald J. Trump will pursue in 2017, it is a relatively safe bet that a repeal of the federal estate tax will be included.
Presently, the federal and estate gift tax credit is $5.45 million per person. Thus, a husband and wife can shelter $10.9 million from federal estate taxes. For estates of either single or married persons beyond the credit amount, the federal estate tax rate is forty (40%) percent. Currently, there are 15 states, including New York and the District of Columbia, that also assess an estate tax. Thus, when the federal estate tax is combined with a state estate tax, as it is in New York, it is not unusual for the overall taxable rate to be close to fifty (50%) percent.
For all the attention the federal estate tax receives, it is still a tax that has no impact whatsoever on more than 99 percent of Americans. For example, in 2015 the Tax Policy Center estimated that 10,800 federal estate tax returns were filed with approximately half being for the taxable estates. According to the Tax Policy Center, the tax collected on the aforesaid returns were in excess of $18 billion dollars. This is a staggering amount of estate tax revenue considering the relatively small number of estate tax returns filed. The collection of so much from so few estates helps bolster the argument of those seeking its repeal that it is onerous and confiscatory in nature.
When a total repeal of the federal estate tax is contemplated, one of the anticipated consequences is that the beneficiary(ies) of the estate does not receive a step up in the cost basis of the assets received for capital gain tax purposes to the date of death value, but receives the assets he or she inherits at the decedent's original cost basis (purchase price) plus any capital improvements. However, under the Trump plan the tax on capital gains above 10 million would have to be paid only when and if the assets are sold. This will obviously place the burden on the taxpayer to retain accurate records as to the cost basis of the assets in his or her estate. Assuming, for the sake of argument, that Trump's proposal to eliminate the Medicare surtax of 3.8% is also implemented, a capital gains tax at the highest rate of 20% would still be imposed on capital gains.
Critics of the Trump proposal argue that its effect will be to allow the wealthiest families to avoid federal estates taxes and create greater dynastic wealth since, in most cases, the beneficiaries will not need to sell the inherited assets. Whereas families with more modest estates will need to sell and pay the capital gains tax.
With respect to the impact of a Trump presidency on Medicaid programs that pay for home care, nursing home care, and other long term care needs, there is greater uncertainty.
President-elect Trump has proposed turning over the control of the program to the individual states. Under his proposal, rather than financing the Medicaid program through a federal match based on enrollment in the program, Trump proposes giving the states a fixed amount of money (known as a "block grant") and letting the states administer the program as they see fit. Under the Trump proposal, the emphasis is to maximize the flexibility of each state to create and deliver long term care as innovatively as possible. The Trump proposal would discourage the states from enrolling as many as possible into their programs and thus, incentivize them to make the programs cost effective.
It should be noted that Trump vowed throughout his campaign that Medicare and Social Security would remain untouched (Obamacare). Additionally, because the Affordable Care Act and Medicaid are so inexorably intertwined, it is difficult to determine whether Trump's block grant proposal will be implemented beyond said healthcare programs.
As is true about so in many things in life, only time will tell where we end up. However, one thing is for certain, for the vast majority of Americans, protecting their assets from the cost of long term care is critical to preserving their life savings. The effects of estate taxes are often of little relevance.