With the new Tax Cuts and Jobs Act, most of us won’t have to pay a federal estate tax. However, with the expanded exemption, there are still several reasons to engage in estate planning, according to an article published in Think Advisor, “9 Ways New Tax Law Could Affect Clients’ Estate Plans.”
The new tax legislation increases the federal estate, gift and generation-skipping transfer (GST) tax exemptions to $10 million (indexed for inflation) per person beginning on January 1, 2018. The exemptions are scheduled to sunset (expire) on January 1, 2026. Things then revert to the current federal law. Of course, there’s always a chance of a repeal of the tax law in a subsequent Congress, so it’s critical to stay informed. However, right now, high-net-worth individuals should pay close attention to these areas:
- Estate planning. A trust can provide protection from creditors and divorcing spouses, along with control over how beneficiaries inherit wealth. A trust can also help preserve wealth for generations.
- Portability election. This allows a surviving spouse to use the deceased spouse’s unused federal estate and gift tax exemption. It’s unchanged and means a married couple can use the full $20 million exemption (indexed for inflation).
- Estate tax liability. For those with a high net-worth who will still have federal estate tax exposure and those who live or own property in states that have their own estate tax, the traditional wealth transfer strategies will still be sound. Talk to your estate planning attorney about your federal estate tax exposure under the new rules.
- Basis step-up at death. This lets a decedent’s assets get a step-up in tax cost to their fair market value at the date of death. It’s unchanged. Therefore, with a much higher federal estate tax exemption, income tax planning is a crucial component of estate planning and estate administration.
- Annual exclusion gifts. Making gifts during your lifetime may be a wise tax planning strategy. The gift tax annual exclusion amount is $15,000 and the gift tax annual exclusion amount is still subject to an adjustment for inflation.
- Basis carryover for gifts. Gifts made during the donor's lifetime will continue to pass to the donee with the donor’s tax cost. Perhaps a donor might wait in making gifts of assets that have significant unrealized gain until his or her death, to give the beneficiary the asset and the step-up in tax cost. There are other considerations in gift tax planning, so talk to your estate planning attorney.
- GRATs. Short-term grantor-retained annuity trusts (GRATs) or qualified personal residence trusts (QPRTs) whose terms end before the Act’s sunset provisions in 2026, will still be a good planning tool for very high net-worth clients.
- Irrevocable trusts. Existing irrevocable trusts that hold low-basis assets should be examined to see if there’s an upside to (and the possibility of) rendering them subject to estate tax in the estate of a beneficiary who might die before the increased exemptions sunset. This could result in a step-up in tax cost (thus reducing capital gains tax for the next set of beneficiaries) without payment of estate tax.
- Closely held businesses. With the exemption amounts scheduled to revert to $5 million (indexed for inflation) in 2026, planning is still vital for families with large closely held businesses and a net worth significantly greater than the exemption amounts. If it looks like reversion to the current law is possible as we get closer to 2026, individuals should determine if an aggressive gifting plan makes sense.
Reference: Think Advisor (January 10, 2018) “9 Ways New Tax Law Could Affect Clients’ Estate Plans”