US Tax Policies 2017: Implications for Your International Wealth Planning

Bernarda PesantezAfter a long summer and fall filled with campaigning for the US presidential election, Inauguration Day 2017 is now set for January 20th, 2017, when Donald Trump will take over as the 45th President of the United States.

You will recall that during his campaign, President-elect Trump made tax reduction a centerpiece of his economic plan, promising a “massive tax reduction and simplification”.

Mr. Trump’s presidency is expected to bring a number of changes in various areas. But today, I want to focus on Trump’s campaign promises for tax reform, specifically those related to individual and business taxes, which are probably the most relevant to readers with an interest in international wealth planning. Without getting too technical, I want to point out a number of opportunities, as well as a few areas that may require adjustments during the upcoming year.

Here’s a quick review of some of the proposals Donald Trump made during the campaign.

Individuals income, investment and estate taxes

  • Consolidate the current seven income tax brackets (currently topping out at 39.6%) into three, with rates on ordinary income of 12%, 25% and 33%.
  • Double standard deductions.
  • Eliminate all itemized deductions except for home mortgage interest and charitable contributions; however, Trump’s proposal includes a $200,000 cap on such deductions. Additionally, per campaign materials, all personal exemptions would be eliminated.
  • Eliminate the 3.8% Affordable Care Act surtax (Net Investment Income Tax) currently imposed on passive income, including capital gains.
  • Align the capital gains tax brackets to fit with his proposed new consolidated three bracket levels.
  • Repeal federal estate and possibly gift and generation-skipping taxes, while still allowing for a step-up in basis for estates under $10 million.

Business taxes

  • Lower corporate tax rate from the current 35 percent to 15 percent.
  • Allow small businesses (pass-through entities), such as sole proprietorships, partnerships and S corporations, to opt for a reduced flat tax rate of 15% on business income earned and retained in the business.

Why are his campaign proposals relevant? Well, it is important to remember that this past summer, Republicans in the U.S. House produced a fundamental tax reform blueprint that in many aspects overlaps Trumps campaign proposals, or vice versa.

With the Republicans having control of the House of Representatives and the Senate as well, the likelihood of Trump’s ability to carry out his tax policy may be quite realistic. Although, it does remain to be seen to what extent or what types of compromises he will need to make to meet the current Republican blueprint half-way. In one way or another, with a Republican president and Congress, the deadlock could very well disappear and pave the way to significant tax reform.

How does this impact your international nest-egg?

It appears likely that the estate and gift tax repeal with some form of carryover income tax basis may happen as it’s also been a principal tax proposal for most Republicans since 2002. Therefore, if the efforts to repeal the federal estate (and possibly the gift) tax are successful, there may be less need to utilize certain wealth planning techniques designed solely to minimize those same taxes.

However, given the uncertainty of whether such a repeal would be retained by future administrations (we saw something similar under the Bush administration), a repeal of gift and generationskipping taxes under Trump could create a unique window of opportunity to transfer significant wealth into multigenerational, domestic or international structures.

Clearly, should these changes be implemented, it could pave the way for restructuring existing family wealth protection and planning vehicles. For instance, assets could be removed from your estate more easily, and they could provide for more flexible management and control than permitted under the current regime.

With estate and gift tax repealed, income tax planning will take center stage. Income tax planning structures such as private placement life and annuity policies for the high net and ultra-high net worth will be in high demand and something to consider for your offshore assets. Combining such income tax efficient vehicles with proper trust structures could afford tax-deferred if not even tax-free wealth management for a very long time.

In conclusion, the Trump administration may afford some opportunities to more efficiently diversify your wealth jurisdictionally without the current complications. I recommend you take advantage of these opportunities. While I believe that there may be reason to be optimistic with Mr. Trump’s election, it is unlikely that he will be able to turn around the profound deficiencies in the US fiscal and economic system on a dime. Mr. Trump, no matter how effective he may be as a president, has inherited a very challenging job. The fiscal, economic, legal and geo-political context is difficult, and the results of his presidency highly uncertain.

Therefore, while taking advantage of positive changes as they evolve, you should not let down your guard when it comes to asset protection and wealth preservation. International investment and currency diversification, jurisdictional and institutional safety, enhanced asset protection, and financial freedom should continue to be important reasons to put in place your international nest egg.

We’ll continue following the developments under this new administration with interest and will be sure to share with you any interesting news on this topic. Meanwhile, feel free to get in touch with us at any time should you want to discuss your current structure or to chat about the options available to US persons.

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