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 in 2024 is $13.61 million per person, or $27.22 million 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), was also effectively doubled beginning in 2018, to $13.61 million per transferor in 2024.

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 was raised to $18,000 per donee.

1. $13,610,000 Estate Tax Exemption in 2024; $27,220,000 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 in 2024 are entitled to exempt the first $13,610,000 from the estate tax (assuming no prior taxable gifts), and estates in excess of this amount are taxed at the rate of 40%. The $13,610,000 exemption, which continues to be indexed for inflation, now allows a married couple, with proper planning, to exempt up to $27,220,000 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 a $13,610,000 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 subject to the estate tax at his or her death.

5. The Lifetime Gift Tax Exclusion is also $13,610,000 (for 2024)

   Individuals can choose instead to make gifts during their lives of up to $13,610,00 in 2024 (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 $18,000 per donee in 2024 (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 $185,000 annually in 2024.

6. Generation-Skipping Transfer Tax Exemption is also $13,610,000 (for 2024)

   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 $13,610,000 for 2024. 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. Unlike the Estate Tax Exemption, however, there is no “portability” provision allowing the transfer of any unused GST Tax Exemption to a decedent’s surviving spouse.

In December 2019, the SECURE Act (“Setting Every Community Up for Retirement Enhancement Act of 2019”) was signed into law. The SECURE Act increased the starting age for taking “Required Minimum Distributions” from 70½ to 72, but it also made significant changes to the rules for distribution of inherited retirement plan accounts, such as IRAs, 401(k) plans and other tax-advantaged accounts, effectively eliminating the “Stretch IRA” or “Stretch 401(k)” as a planning tool for any beneficiary other than a surviving spouse.

Prior to the SECURE Act, non-spouses inheriting retirement accounts were generally allowed to stretch out disbursements from the account over their lifetimes, which allowed for longer tax-deferral. The new rules now generally require the distribution of any IRA or 401(k) account to be completed within 10 years of the death of the original account holder. Surviving spouses who inherit retirement accounts, however, may generally continue to elect to receive distributions over their remaining lifetimes. For others, the shorter 10-year time frame for distributions will result in the acceleration of income tax due, possibly pushing them into higher tax brackets and reducing the net benefits of inheriting such accounts,

Absolutely. While the new exemption amounts mean that all but the largest of estates will avoid the federal estate tax, 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 also 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 are distributed to children from a previous marriage or 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.

Everyone with a retirement plan should check their beneficiary designations to see if changes should be made in light of the SECURE Act. For some who are charitably inclined, it may make sense in some cases to leave some or all of the retirement accounts to charity, and other assets to spouses, children and others.

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 choose 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? Have your beneficiary designations been reviewed in light of the SECURE Act? 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.