Gadsden Schneider & Woodward LLP

Gadsden Schneider & Woodward LLP

Letter to Clients and Friends

July 28, 2017

Page 1

July 28, 2017

To Our Clients and Friends:

We hope you are enjoying the summer season. We want to highlight some matters relating to your estate planning. More specifically, in this newsletter we will briefly describe where things currently stand on the potential repeal of the estate tax, which we hope will help you to better understand any new bill that may be introduced in Congress, remind you ofthe importance of coordinating beneficiary designations with the rest of your estate plan, and inform you of certain changes to Pennsylvania law regarding powers of appointment. In addition we want to share with you certain changes in our firm.

Estate Tax Repeal: Things to Look Out For

The outlinesof President Trump’s tax plans(released by his campaign last September andby the White House earlier this summer) and House Speaker Ryan’s 2016A Better Way policy agendacall for the repeal of the so-called “death tax,”signaling that estate tax repeal is—or at least may be—a priority for the White House and the Republican majority in Congress. An estate tax repeal bill, the Death Tax Repeal Act of 2017,is pending in both the Senate and the House, although it is generally considered unlikely that it could pass the Senate with enough Democratic support to avoid a filibuster in its current form. Nevertheless, here are some issues to be on the lookout for as estate tax repeal comes into focus:

• Timing of Repeal. The above proposals of President Trump and Speaker Ryan do not speak to the timing ofthe repeal. The possibilities includea phase-out of the estate tax over time or an immediate, retroactive or delayed repeal. The Death Tax Repeal Act would repeal the estate tax immediately for the estates of all individuals who die after its enactment. In contrast, you may recall thatthe Economic Growth and Tax Relief Reconciliation Act of 2001, part of the Bush tax cuts,phased outthe estate tax byincreasing the lifetime exemption and reducing the top estate tax rate over eight years beforetemporarily repealing the estate tax for 2010.

• Gift Tax. The gift tax’s original purpose was to prevent people from giving away assets during life to avoid estate tax at death. The argument for keeping the gift tax without the estate tax is that italso serves as a backstop to the income tax, preventing taxpayers fromstrategically minimizing the overall family tax burden by making gifts tofamily members who are in lower tax brackets or outside the reach of United States taxes. Notably, none of the Death Tax Repeal Act orthe above-mentioned proposals by President Trump and Speaker Ryan includes repeal of the gift tax; they all either explicitly retain the gift tax or are silent on its repeal. The gift tax was retained when the estate tax was repealed during 2010, so it may well survive estate tax repeal, as counter-intuitive as that may seem.

• Generation-Skipping Transfer Tax. The generation-skipping transfer tax (the “GST tax”) supplements the gift and estate taxes by imposing a separate transfer tax to ensure that at least one transfer tax is paid as property is transferred from generation to generation. Speaker Ryan’s A Better Wayand the Death Tax Repeal Act both explicitly call for the repeal of the GST tax, and President Trump’s outlinesrefer simply to “the death tax,” which may include both the estate tax and GST tax. This would follow what happened in 2010 when the GST tax was repealed in its entirety along with the estate tax. However, the GST tax currently applies to transfers both during life and at death, so if the gift tax is retained, the corresponding portion of the GST tax could be retained as well.

• Basis “Step-up.” Under current income tax law, the basis of most assets in a decedent’s estate receives a “step-up” to the fair market value at the time of the decedent’s death (or “step-down,” if the date-of-death fair market value is less than the basis). Speaker Ryan’s proposal and the Death Tax Repeal Act both leave the basis step-up in place. When the estate tax was repealedin 2010, the basis step-up was retained but the total amount that could be stepped-up was limited. Another possibility is replacement of the basis step-upby requiring thatcapital gainsbe realized at death,as is done in Canada. Since Canada abolished its estate tax in 1972, death is treated as a sale of all the decedent’s assets (except to the extent the assets are inherited by the decedent’s spouse), so that any built-in gains and losses are realized and taxed at death. President Trump’s campaign outline appeared to call for a capital gains taxon assets held until death, with an exemption of $10 million, without specifying whether that tax should arise at death or when the inherited property is later sold. His more recent outline makes no mention of the basis step-up at all. A realization-at-death tax is arguably an estate tax replacementrather than true repeal, one that ironically could impact more (or different) people than those currently affected by the estate tax. This maystill be a fallback or compromise position if for whatever reason agreement on full repeal is unattainable.

• Sunset of Repeal. When the estate tax was repealed in 2010, it was set to be reinstated in 2011in order to make use of “reconciliation,”a Senate budgetary process that allowed it to pass with a simple majority. Given that Senate Republicans are well short of a filibuster-proof majority, it is likely that they will again need to utilizereconciliation to pass estate tax repeal, which may involve another tenyear sunset. As many will recall, the tenyear expiration of the Bush tax cuts caused great uncertainty in the estate tax planning field. If a sunset of the same nature is enacted again, estate planning will be as important as ever—both to preserve flexibility in the face of uncertainty and to ensure that if the estate tax does return, nobody is worse off than if there had been no repeal in the first place.

Importance of Coordinating Beneficiary Designations with the Estate Plan

A recent case provides a strong reminder of the importance of coordinating beneficiary designations, including transfer-on-death designations, with the rest of the estate plan. In Matter of Sukenik, a New York case,the testatorexecuted a will and revocable trust, leaving the residue of his estate to charity. Yearslater he designated his wife as the beneficiary of his IRA. Death does not wipe out built-in income tax liability with respect to a decedent’s IRA (unlike most assets, which receive a basis step-up). As a result, the widow received an asset with a large built-in income tax liability. After her husband’s death, the widow petitioned the court to alter the estate plan in order to reduce the tax liability by changing the IRA beneficiary to charity, with an offsetting bequest from the estate to her equal to the IRA value. Because the charitable beneficiarywas tax-exempt, it could have received the IRA assets without any income tax liability, so the after-tax result would be neutral as to the charity while allowing the widow to keep more. The court refused to amend the decedent’s revocable trustbecause such post-mortem alterations are only available when changes in law or circumstances create unforeseen problems in an estate plan. In this case, the designation of the decedent’s wife as the IRA beneficiary had been tax-inefficient from the beginning, not as the result of unforeseen circumstances. Carefully coordinating the beneficiary designations for retirement accounts(and other nonprobate assets)is essential to well-designed estate planning and matching appropriate assets to beneficiaries (by allocating retirement accounts to charitable beneficiaries, for example) to avoid unnecessary additional taxes.

Power of Appointment Changes

A Pennsylvania law that came into effect at the start of this yearadds new possibilities for how powers of appointment can be exercised. If you are the beneficiary of a trust and have a power of appointment that youwanted to exercise to create a further trust after the termination of the existing trust, you may have more flexibility to do so under the new law.

Firm News: New Offices, New Website and New Faces

In December we will be moving to new offices in Building One of the Glenhardie Corporate Center in Wayne, just off Swedesford Road, very near the junction of the Turnpike, Route 202 and Route 422 in King of Prussia. Our current offices have served us well for more than a decade, but this new location will give us more room to grow.

We are also happy to report that since our last newsletter, we have made several additions to the firm. Kate Crary has joined us as Counsel. She was previously a member of the Private Client Services Department of the law firm of Cozen O’Connor in Philadelphia and brings strong experience in both estate planning and estate administration. We are delighted that Lorraine Stone, who worked as a paralegal at our firm from 2008 to 2010, has returned, and that Erica Wellington has joined the firm as a paralegal after Betsy Eck’s retirement earlier this year. Finally, Nida Mohsin Syed has taken over as our Accounting Manager since Kathy Kauffman’sretirement.

Finally, look out for our newly designed website, where you can find information about the firm and our attorneys, directions to the office, and copies of this and prior years’ newsletters.

Gadsden Schneider & Woodward LLP

Christopher H. Gadsden / / 484-683-2623
W. Steven Woodward / / 484-683-2622
Tracy Blake DeVlieger / / 484-683-2617
Kim V. Heyman / / 484-683-2616
Pam H. Schneider / / 484-683-2615
Lisa M. Rhode / / 484-683-2630
Kathryn H. Crary / / 484-683-2624
Timothy D. Miles / / 484-683-2632

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

As mentioned in our previous mailings, we would like to keep you informed of new developments by email. If you would like to receive such email updates, please “Join Our Mailing List” at our website

{00372767.DOCX / }