On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “2017 Act”) which, among other items, made several changes to the federal wealth transfer tax system with respect to transfers occurring during calendar years 2018 through 2025.

Background

Prior to enactment of the 2017 Act, the first $5 million (as adjusted for inflation in years after 2011) of transferred property could be exempted from gift, estate and generation-skipping transfer (GST) tax. For estates of individuals dying and making gifts in 2017, the applicable inflation-adjusted exemption amount was approximately $5.5 million (or $11 million for a married couple).

New Law

Under the 2017 Act, this basic exemption amount was doubled from $5 million to $10 million, which, after being indexed for inflation, is now $11,180,000 for 2018 (or $22,360,000 per married couple). However, the increased exemption amounts are scheduled to “sunset” or revert on January 1, 2026, to the 2017 levels, as adjusted for inflation.

Considerations for Action

What should individuals do in response to these changes in the estate, gift and GST tax law? The following is a summary of some of the initial issues to consider in light of the 2017 Act:

Review your current will and estate plan.

The substantially increased estate tax exemption amount may permit the wills of married couples to be simplified. For the past 30+ years, the wills of many clients have included tax-planning provisions creating a so-called “bypass trust” or “family trust” to protect the estate tax exemption of the first spouse to die of a married couple. While there are many non-tax reasons to continue to use such a trust, the increased $11,180,000 estate exemption may enable some married couples to eliminate such a trust and allow assets to be given outright to the surviving spouse.

In addition, many wills and other estate planning documents are designed to minimize estate taxes through the use of formula provisions that are dependent on the estate tax exemption amount, the GST tax exemption amount, or both. Because of the changes under the 2017 Act, these formula provisions may produce serious unintended consequences for a person dying between 2018 and 2025, including the possibility of materially altering the intended beneficiaries receiving property under a person’s will.

For example, assume that a person’s will makes a gift equal to “the largest amount that can pass free of federal estate tax” to his or her children, with the remainder of property given to such person’s spouse, and that person has less than $11,180,000 million of assets passing through his or her will. If this person dies while the 2017 Act is in effect, the children may receive 100% of this person’s property and the surviving spouse may receive no property. Other examples would include wills that have similar formula provisions to make charitable gifts or generation-skipping gifts for grandchildren.

We think it is very important that you consider these recent changes in the tax law in connection with your current estate plan and encourage you to review these matters as one of your 2018 New Year’s resolutions. At a minimum, you should be aware of the possible impact of the 2017 Act on your estate plan and should consider what changes, if any, should be made to your will and other estate planning documents.

Make current gifts for family members.

For individuals who want to make gifts to family members, gifts may be made during 2018 that utilize an individual’s unused $11,180,000 gift tax exemption amount, or $22,360,000 gift tax exemption amount per married couple (taking into account prior gifts). Such a gift may be made outright or in trust, and unused GST exemption may be allocated to a gift into a long-term trust to protect it from future estate and GST taxes. You may also want to leverage these gifts using your gift and GST tax exemption amounts through other estate planning strategies, such as sales of assets to grantor trusts, intra-family loans, grantor retained annuity trusts (GRATs), and split-interest charitable trusts.

Family Business Advocates: 2017 Highlights and Plans for 2018As we reflect on 2017, we thank our blog subscribers for making Family Business Advocates a great success. In case you missed them, below are some of our most popular blog posts from 2017:

We also hosted two well-attended and thought-provoking events with our clients and friends. In February, we hosted “Economic and Legislative Outlook for Family Business Owners,” and in November, we hosted “Transitions in the Family Business, Conversations with Family Business Owners and Leaders.”  Our “Transitions” event was followed by several blog posts highlighting insights from the family business owners and leaders who were panelists at the event.

Looking ahead, we expect that the recently enacted federal tax reform legislation will remain a dominant topic in 2018. The new tax law has already generated a substantial amount of commentary from accounting firms, law firms and other advisors. In the coming weeks, our Family Business Advocates blog will focus on key elements of the new tax law that impact family business owners. We plan to host an event for clients and friends in early March to discuss and exchange ideas about how the new tax law may impact, and create opportunities for, family business owners.

Please be on the lookout for our upcoming blog posts on the new tax law, and stay tuned for more information about our event planned for March.

Emergency Succession: Lessons from Nick Saban and Dabo SweeneyI was recently discussing emergency succession planning with my friend John Howe, CEO of American Pipe and Supply. Okay, actually we were talking about football over a couple of beers. John is a Clemson grad and a big fan of the Tigers. I am a third generation Crimson Tide fanatic. So, John and I have had a lot to talk about for the last couple of years. But, as is often the case (with me), our conversation turned into a discussion of (what else) emergency leadership transition.

A few weeks earlier John and I had been together with a group of CEOs that we meet with each month to discuss and share business (and personal) experiences, as well as lessons learned. At that meeting, we discussed the importance of having an emergency succession plan. Basically, that is a plan for what to do when there is an unanticipated leadership change. Any organization with a leader, or leaders, should have an emergency succession plan. It does not have to be a beautifully written legal document (though we’re always standing by if that is what you want). It simply needs to be a well-thought-out plan for what the remaining leadership of the organization should do to ensure that the organization does not founder if it unexpectedly loses a key leader – most often the CEO.

So, how do Coach Saban and Coach Swinney fit into this conversation? John and I both noted that these coaches always seem to have another player ready to go when a key player is lost to injury, graduation or the NFL. It seems to be a very effective “next man up” system. We talked about what it takes to have that same system for success in a business.

I mentioned to John that I recently heard Coach Saban on his weekly radio show say that he recruits players who buy into the program (i.e., fit the culture), are talented and are coachable. He always has a pipeline of talent that can take over when needed. I believe Coach Swinney has a very similar approach. John noted that, like Coach Swinney, he hires people who have the “right chemistry” and then trains the recruit for the job. John wants people who he can visualize going at least two positions above the job they are hired to perform. I think that is probably what our coaches do, too. That is, they have to be able to visualize a green 18-year-old being able to perform at a much higher level as an upperclassman and, in some cases, to be the leader of the team.

But John is also quick to add that “you have to do the training.” You cannot simply hire (or sign) very talented people who fit the culture and not provide them coaching and resources. Like Coach Saban and Coach Swinney, you recruit five-star talent and coach that talent to win championships. In John’s organization, each employee has an Individual Development Plan that is agreed to by the employee and the supervisor. The employee is mentored, and progress is tracked. Like at Alabama and Clemson, accountability to your teammates is key. This effort should produce the leaders of the future.

John says at his company there is no “second string” – everyone is a contributor. I noted that Coach Saban takes the same approach. I have seen him annihilate a reporter for asking him about the team’s depth chart!

To summarize, for a company to have the best chance for continued success when an unplanned leadership change occurs there must be talented, well-prepared people who are committed to the team and ready to take over the leadership role.

One additional element I recommend is for leadership to have a written emergency succession plan. The plan should outline the steps for succession, the person who is to be the next leader and the immediate job description. I expect Coach Saban and Coach Swinney have a “plan B” as part of their game plan – what to do on the spot if a crucial player goes down in a game.

So, the key elements as exemplified by our coaches (and John Howe) are:

  • Plan/think about/know the need – Who is absolutely key that may need to be replaced quickly?
  • Recruit the right talent – Hire people who can step up when needed. There is no second string!
  • Do the training – Someone should be prepared to step in at any time (e.g., QBs at Bama and Clemson).
  • Have a written plan – Be prepared with a plan in case of emergency when folks aren’t thinking as clearly as usual.

This blog post is co-authored by John Howe, CEO of American Pipe and Supply.