The election of Donald Trump along with Republican control of both houses of Congress undoubtedly will impact tax and benefit laws that affect citizens in their personal lives and in their estate and long-term care planning. The question is how? We can't answer for certain since during his campaign the president-elect stayed away from specific policy proposals. But there's still a lot we can glean both from what he has said and from Republican policies, especially those of Speaker of the House Paul Ryan. On the domestic front, Ryan appears much more radical than Trump in many ways.
Medicaid (MassHealth in Massachusetts) is the safety net health insurance program for the poor and the main payer for long-term care in the country. Helping clients and their families navigate its byzantine rules has been a large part of elder law practices for decades. Those rules may change drastically in coming years. Republicans in Congress have long pushed to change the structure of the program from one where Congress and the Centers for Medicare & Medicaid Services set the ground rules and the states fill in the details to one that's more decentralized with block grants through which the federal government sends money to the states and they choose how to spend it on health care. This could mean 50 very different Medicaid programs and raises many questions, including:
- How much will the states spend? Currently there's a match with the state and federal governments sharing Medicaid costs, the ratio for each state depending on a variety of factors. If the states in effect get a blank check, will they cut their own costs and provide less care to their neediest citizens? Or will the checks be too small forcing the states to spend even more of their taxpayers' money?
- What will the eligibility rules look like? Will they stay more or less the same or will the states take this opportunity to revamp them completely? For long-term care purposes, will they extend the look-back period for transfers to 10 years, as some have suggested, or get rid of protections for spouses of nursing home residents?
- How big will the block grants be? Will the federal government seek to save money by reducing the size of block grants, straining state budgets?
With each state going its own way, one can imagine that some states will be freed up to be creative and provide better, less expensive care for their citizens while others will simply see this as a way to save money by spending less on the care of their most needy residents.
While Trump has said little or nothing about Medicare, Ryan has talked about phasing it out to be replaced by private health insurance with subsidies for lower-income seniors. He has said that this change would only affect future, not current, beneficiaries. Interestingly, this proposal is similar to "Obamacare" for younger Americans, which the Republicans have attacked from inception even though it is, essentially, a Republican health care plan modeled after the Romney plan in Massachusetts. Other Republicans have also talked about raising the age of eligibility for Medicare from 65 to 66 or 67.
We're less likely to see changes in Social Security. Trump has said: "We're gonna save your Social Security without making any cuts. Mark my words." Ryan, on the other hand, has supported plans similar to what President George W. Bush proposed, permitting younger workers to divert some of their Social Security dollars into private investment accounts. Bush never got much traction with his plan and support waned after the 2008 recession. I don't see significant changes arising soon on the Social Security front.
While it will affect few of you reading this blog, Trump would like to eliminate the estate tax. Here are a couple of his comments on the topic: "The estate tax has been a disaster; it's double taxation." "The estate tax is a horrible weapon that has destroyed many families." That would, of course, save Trump's heirs many hundreds of millions.
The problem for the rest of us is that Trump and Congress may pair removal of the estate tax with the elimination of the adjustment of basis at death for purposes of capital gains. To explain how this works, if you bought a house for $200,000 and today it's worth $500,000, if you sell it you'll have $300,000 of capital gain subject to tax of up to 25%. However, if it's your home you can exclude $250,000 of gain from tax and if you're married you can exclude $500,000. But if you pass the house to your children and they don't live there, they won't be able to exclude the gain. Fortunately, under current law, at death the basis is adjusted to the property's fair market value, thus eliminating any gain on its sale. If this adjustment were eliminated, it would mean that everyone inheriting property that has increased in value would receive it with the same basis as the decedent. This sometimes referred to as a "carry over" basis. Then, when the new owner sells the property it would be subject to tax on the gain. This could affect all estates, not just those exceeding $5.45 million in value, the current federal estate tax threshold. (The threshold for the Massachusetts estate tax is $1 million, but the tax rate is much lower than the federal rate of 40%.)
Trump has also proposed taxing gain at death, rather than simply on the sale of property. This has been referred to as "mark to market." This would result in a 20% tax on gain at death, half the current estate tax rate. Trump would exempt all estates under $10 million.
The adjustment of basis is also useful for cleaning up records for inherited shares of stock and other assets where it can be difficult to determine the original purchase price. With the new basis set at the date-of-death value it makes it much easier to determine the gain when the property is sold. I'm concerned that some of these changes may mean not only taxing more estates but further complicating the process. (On the other hand, what's wrong with more work for lawyers and accountants? -- just a joke.)
While now we can only guess at what a Trump presidency means for estates and long-term care planning, this will become more clear in the months and years ahead. Undoubtedly, there will be legislative fights on these issues. If control is passed to the states, these fights will occur on both the federal and state levels. This means that any change will take time. We will do our best to keep you informed as developments occur.