Estate Planning and Wealth Transfer

The New Tax Act – A Year LaterOn 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.

Here we are, another year older, another year wiser, and with a full year of living under the 2017 Act under our belts. So, what have we learned?

By way of quick reminder, under the 2017 Act, the basic exemption amount was doubled from $5 million to $10 million, which, after being indexed for inflation, is now $11,400,000 for 2019 (or $22,800,000 per married couple). However, the increased exemption amounts are still scheduled to “sunset” or revert on January 1, 2026, to the 2017 levels, as adjusted for inflation.

Review Your Documents.

Based on the number of clients we have seen (and not yet seen) in our practice over the last year, many of you may not have had the time to reach out to your estate planning and tax advisors to review your current wills and estate plan. If you have reviewed your plan, we trust you have satisfied yourself that your current will, perhaps with some tweaks here and there upon the advice of your lawyer, still causes your wealth to be distributed in accordance with your goals and objectives. If this year has gotten away from you before you could review your documents, here is a brief summary of the types of changes that may be made.

  1. Many carefully drafted 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 historically high exemption amounts introduced 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 $11,400,000 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, before providing for a spouse or children. As much as we advisors work to build flexibility into your estate planning documents, even the best laid plans must be reviewed every five years and certainly after a significant change in the tax law like that made by the 2017 Act.

    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 2019 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.

  1. In addition, 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 $11,400,000 estate exemption may enable some married couples to eliminate such a trust and allow assets to be given outright to the surviving spouse.

Time to Make Gifts?

There is also an opportunity to take advantage of these historically high exemption amounts to make lifetime gifts. For individuals who want to make gifts to family members, gifts may be made during 2019 that utilize an individual’s unused $11,400,000 gift tax exemption amount, or $22,800,000 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.

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.

2018 Will Bring Increases to Annual Exclusion, Gift and Estate Tax ExemptionsThe IRS has announced that the gift tax annual exclusion will increase from $14,000 to $15,000 in 2018, which will allow donors to give up to $15,000 ($30,000 combined for married couples) per donee each year without incurring gift tax or using the lifetime gift and estate tax exemption. In addition, the lifetime gift and estate tax exemption will increase from $5.49 million in 2017 to $5.60 million ($11.2 million combined for married couples) in 2018. Finally, the generation-skipping transfer tax exemption will similarly increase to $5.6 million. With respect to annual exclusion gifts to non-U.S.-citizen spouses, the amount will increase to $152,000 in 2018, up from the current $149,000. These recently announced increases are the result of inflation adjustments. To determine the strategies available to you to take advantage of these increased exemption amounts, please contact one of the members of our Family Business Advocates team.