Estate Planning After the Tax Cuts and Jobs Act of 2017

Most people are familiar with the changes in the income tax rates for individuals and businesses that became effective on January 1, 2018 under the Tax Cuts and Jobs Act of 2017. However the Act also made significant changes to the estate and gift tax exemptions, effectively doubling them. Now, after adjustment for inflation, the basic estate tax exclusion amount is $11.18 million per person, or $22.36 for a married couple.

The exemption from the Generation-Skipping Transfer Tax, which applies to transfers to persons two or more generations below the transferor (e.g. gifts to grandchildren), is also effectively doubled beginning in 2018, to $11.18 million per transferor.

These increased estate, gift and GST exemption amounts will “sunset” after 2025, returning to the exemption amounts that were in place at the end of 2017.

The Annual Gift Tax Exclusion, which has not been adjusted for inflation since 2013, is now $15,000 per donee.

1. $11,180,000 Estate Tax Exemption in 2018; $22,360,000 for Married Couples
Only the largest of estates are now subject to the federal estate tax (some states have their own estate tax). Estates of persons dying after 2017 are entitled to exempt the first $11,180,000 from the estate tax (assuming no prior taxable gifts), and estates in excess of this amount are taxed at the rate of 40%. The $11,180,000 exemption, which continues to be indexed for inflation, now allows a married couple, with proper planning, to exempt up to $22,360,000 of their combined estate from the estate tax.

2. Portability of the Unused Estate Tax Exemption
For a surviving spouse to exempt this full amount from the estate tax, steps must be taken at the death of the first spouse to preserve his or her unused estate tax exemption. This is so, even if the first spouse to pass away did not have an $11,180,000 estate. This provision is called the “portability” of the estate tax exemption, and it is not automatic – it requires the deceased spouse’s executor to make an election on a timely filed Estate Tax Return after the death of the first spouse, to preserve this unused exemption amount.

3. Stepped-up Cost Basis at Death is Preserved
The provision allowing for the cost basis of assets received from the estate of a decedent to be adjusted to their fair market value on the date of the decedent’s death is preserved. While this provision applies to real estate, securities and most other assets, it does not apply to annuities, pensions and retirement plans.

4. The Unlimited Marital Deduction
The “unlimited marital deduction” for transfers from one spouse to their U.S. citizen spouse, either during life or at death, is not changed. This means that U.S. citizen spouses can freely transfer assets to each other without incurring an immediate gift or estate tax, although the assets will be included in the estate of the surviving spouse and may be taxed at his or her death.

5. The Lifetime Gift Tax Exclusion is also $11,180,000 (for 2018)
Individuals can choose instead to make gifts during their lives of up to $11,180,000 in 2018 (indexed for inflation) that are exempt from any gift tax. This requires the filing of a gift tax return for amounts exceeding the “annual gift tax exclusion” which is now $15,000 per donee in 2018 (also indexed for inflation). Any gift tax exemption used during life will continue to count against, and be deducted from, the donor’s remaining estate tax exemption. Gifts to non-U.S. citizen spouses are limited to $152,000 annually, up from $149,000 in 2017.

6. Generation-Skipping Transfer Tax Exemption is also $11,180,000 (for 2018)
Large gifts to grandchildren or more remote generations have for decades been subject to a separate additional tax, the Generation-Skipping Transfer Tax (or GST) Tax. Individuals were previously allowed an exemption from the GST Tax, which was $5,490,000 in 2017, and is now $11,180,000 for 2018. This opportunity, when combined with Nevada’s 365-year long “Rule Against Perpetuities” allows donors to create and fund multi-generational trusts, either during life or at death, that are exempt from both the gift and estate tax, as well as the GST tax, up to the limits of the available exemptions.

Absolutely. While these new exemption amounts mean that all but the largest of estates will avoid the federal estate tax altogether, these provisions affect smaller estates in other ways. For instance, many pre-2018 living trust-based estate plans contain formula provisions that mandate the creation of an “A/B” trust (a bypass, credit shelter, or marital deduction trust) at the first spouse’s death in order to preserve his or her estate tax exemption. “Portability” of the deceased spouse’s unused estate tax exemption to the surviving spouse may have rendered that not only obsolete, but unnecessarily expensive to implement and maintain.

On the other hand, some “A/B” provisions may continue to be necessary to ensure that the deceased spouse’s assets went to children from a previous marriage, or were set aside to protect the assets from the claims of the surviving spouse’s creditors and predators, or to achieve philanthropic or other objectives. Every estate plan that contains a formula provision must be reviewed in light of the new tax law, to determine if it will still “work” as expected at death.

Now that all but the largest estates are effectively exempt from the federal estate tax, why is estate planning still important? Because proper estate planning can ensure that your estate will pass what you have to those you want to have it, how and when you want them to have it, saving every possible tax and administrative expense, while keeping your personal financial affairs as private as possible.

A fully funded revocable living trust will avoid the costs and delays of probate upon your death. It will also avoid guardianship or conservatorship if you became too ill to manage your own affairs. Your estate plan will also ensure that someone you chose will make critical health care decisions for you if you are unable to make decisions for yourself.

Other types of trusts and estate planning techniques can be implemented to protect your assets from the reach of your future creditors.

A revocable living trust will ensure that your assets are managed and distributed by people you know and trust, minimizing or preventing loss from mismanagement and mistakes. A living trust can also be designed to help protect your loved one’s inheritance from creditors, their own immature spending habits, and from those who would take advantage of them.

Your estate plan can protect and preserve your estate if your spouse remarries after your death, and can ensure that your minor children will be raised and cared for by those you have chosen, with funding, guidance and instructions that you provide. If you have children from a previous relationship, or a child with a disability, your estate plan can ensure that they will be provided for as you direct, while preserving their eligibility for governmental assistance.

More than 70% of family-owned businesses do not survive the transition from the founder to the second generation. Your estate plan can ensure that your business will survive you intact and under the control of your chosen successors, preserving its value for your family.

Your estate plan can allow you to determine the optimal plan for the distribution of your retirement assets, including whether income and estate taxes should be paid out of the retirement plan itself or another source, while preserving the ability for your beneficiaries to “stretch out” distributions over the longest possible time.

Increasingly, the job of the estate planner is to help clients understand that proper planning has less to do with estate tax planning and more to do with estate planning. This requires ascertaining the client’s goals, educating them about the possibilities, and designing a coordinated and integrated plan that fits their specific objectives, while keeping the plan as flexible as possible to be able to respond to changing circumstances. The new estate, gift and GST tax exemptions have not eliminated the need for proper planning – they have merely shifted its focus.

What should you do now? First, find a competent estate planning attorney - one who is both knowledgeable about the current law and who is also willing to spend the time needed to meet with you to ascertain your goals and learn about what is important to you. Next, make a commitment to participate in the estate planning process and see it to completion. Estate planning is a dynamic process, not a discrete event. A good estate plan needs to be comprehensive, yet flexible enough that it can be amended to keep pace with changes in your personal and family situation, as well as changes in the law.

If you already completed your estate plan, ask yourself, was your planning prepared by a competent professional? Has it been reviewed and revised in light of changes in the law? Has it been reviewed in light of your current financial situation? Does your existing plan properly account for all of your current assets and liabilities? Does it do for you and your loved ones all that it can or should? You owe it to yourself and your loved ones not to overlook this critical component of your personal financial planning.

The information provided above is not intended to provide legal advice, it may not apply to your specific factual situation or jurisdiction, and should not be relied upon. Please consult your own legal counsel.