The Doubling of the Exemptions to the Federal Estate, Gift, and Generation-Skipping Transfer Taxes Creates Both Planning Opportunities and the Need to Revisit Your Estate Plan.
The Tax Cuts and Jobs Act (the “Tax Bill”), signed into law on December 22, 2017, makes significant changes to portions of the federal tax code governing transfer, income and corporate taxes. Though the Tax Bill does not repeal federal estate, gift or generation-skipping transfer (“GST”) taxes, it doubles the exemptions applicable to them, thus shielding approximately $11.2 million of assets transferred by an individual, or $22.4 million by a married couple. These new exemptions, effective January 1, 2018, “sunset” to their prior levels at the end of 2025.
The rate of tax for transfers in excess of the exemption amounts remains at a flat 40%. The income tax cost basis of assets owned by a decedent will still be adjusted, in many cases “stepped up,” to fair market value as of the date of death. Additionally, “portability,” or the use of a deceased spouse’s unused exemption amount, will still be available to a surviving spouse.
The increased exemptions to the transfer taxes will, unless later extended, return to the previous levels of $5 million (adjusted for inflation), creating a window of opportunity for certain planning techniques, and an incentive to revisit your plan to ensure that your assets still pass in the manner and proportions intended.
Consider Lifetime Gifts
Some clients will consider making additional lifetime gifts to utilize the increased gift and GST tax exemptions before they sunset in 2025. The annual gift tax exclusion is also still available and has increased to $15,000 per recipient per year for 2018.
Review Your Estate Plan
The new exemption amounts also create planning opportunities. Clients who are no longer subject to estate tax (through 2025 at least), may choose to simplify their estate plans, eliminate tax-driven structure or incorporate more flexibility. Now that their estates are protected from higher-rate transfer taxes, they may focus on income tax reduction due to the basis “step-up” of assets.
Other clients, particularly those with estates over the increased exemption amount, may want to establish trusts to utilize the increased GST exemption for the benefit of younger generations over very long periods of time in a tax efficient manner.
The new exemptions may also impact estate plans in unintended ways. In some cases such plans provide bequests, outright or in trust, equal in amount to the estate or GST tax exemptions in effect at the time of death. In light of the increased exemption amounts, such “formula” bequest provisions may seriously distort the plan. Married clients living in states with a state estate or inheritance tax should consider updating their plans to provide the flexibility to defer state taxes until the death of the survivor of them, if they have not already done so.
Continuing Importance of Trusts
Trusts achieve many planning objectives, other than federal estate tax minimization, and will continue to be relevant for many purposes, including: protecting assets from creditors, providing centralized management of assets (particularly useful in instances of incapacity), ensuring assets pass to intended beneficiaries, limiting access to assets by certain beneficiaries, and reducing state transfer and income taxes.
Additional Options for 529 Plans
The Tax Bill expands the definition of qualified tuition payments to include the payment of elementary or secondary tuition at public, private or religious institutions. Funds from 529 plans may now be used for these expenses up to $10,000 per student per year. 529 plans may also be rolled over into ABLE accounts for disabled beneficiaries.
Income Tax Changes
Although a discussion of such changes is beyond the scope of this summary, clients should be aware that the reduction in tax rates for individuals and corporations, limitations on deductions, and new rules applicable to pass-through entities will also impact the income taxation of trusts and estates.
The ramifications of the Tax Bill will continue to unfold as new IRS regulations are released. We would be glad to speak with you about how the Tax Bill impacts your individual estate plan.