Tax Cuts and Jobs Act of 2017 and Estate Planning

On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017 (the “Act”), which has significant effect on federal tax laws. Highlights include the modification of individual and corporate tax rates, the application of a deduction to qualified flow-through business income, and the doubling of the estate tax exemption amount, the last of which is the focus of this article. Many of the provisions of the Act are temporary, with application from 2018 through 2025, at which time the provisions revert to the law in place in 2017.

With regard to the estate tax modifications, the Act retains the estate tax but doubles the exemption amount for federal estate and generation-skipping taxes to $10,000,000 per person, indexed for inflation. For 2018, this inflation-adjusted amount is expected to equal approximately $11,200,000 per person. The Act does not affect the “portability” of a decedent’s exemption amount, and therefore a decedent may pass his or her unused exemption amount to his or her spouse, allowing a married couple to utilize both of their exemption amounts, or approximately $22,400,000 in 2018 to avoid estate tax. The Act also doubles the gift tax exemption to $10,000,000 per person, indexed for inflation, providing opportunities for wealthy clients to avoid gift, estate, and generation-skipping taxes by making significant gifts. While not part of the Act, you should also be aware that the annual exclusion from gift tax has increased to $15,000 per person for gifts made in 2018.

As a result of the changes, you should consider your estate plan and the Act’s effect on it. The doubling of the estate tax exemption may particularly affect certain plans where the estate tax exemption amount determines the amount of assets to pass to specific beneficiaries (or trusts for specific beneficiaries). For example, each of the following circumstances will be greatly affected by this increased estate tax exemption amount:

1. Generation-skipping tax planning. Plans in which assets equal to the generation-skipping tax exemption amount pass to one or more trusts for the benefit of the individuals' grandchildren or to a trust for the benefit of the individuals' children for their lifetimes, with ultimate distribution to the grandchildren. As a result of the doubling of the estate tax exemption amount, such a plan could result in the first $22,400,000 of assets passing into such trusts, with the potential to leave no assets remaining for outright distribution to the individuals' children.
2. Marital trust planning. Plans in which, upon the first death, assets equal to the estate tax exemption amount pass outright to the individuals’ children or to a Family Trust to be held solely for the benefit of the individuals' children or more remote descendants, while the excess assets over the estate tax exemption amount pass to a Marital Trust to be held for the surviving spouse’s benefit. As a result of the doubling of the estate tax exemption amount, such a plan could result in the first $11,200,000 of assets passing into a Family Trust solely for the children’s benefit, with the potential to leave no assets to or for the surviving spouse.
3. Charitable planning. Plans in which, upon the second death, assets equal to the estate tax exemption amount pass outright to the individuals' children or other family members or to a Family Trust to be held for the benefit of the children or more remote descendants, while the excess of a assets over the estate tax exemption amount pass to one or more charities. As a result of the doubling of the estate tax exemption amount, such a plan could result in the first $22,400,000 of the assets passing into a Family Trust for the benefit of the individuals’ children and other family members, with the potential to leave no assets remaining to pass to the charities.
4. Irrevocable trusts and capital gains tax planning. Plans in which irrevocable trusts were previously utilized to remove assets from an individual's estate (or established at the first spouse’s death) to take advantage of gift or estate tax strategies or shelter anticipated appreciation of the asset. As a result of the doubling of the estate tax exemption amount, the exclusion of an asset held in an irrevocable trust from an individual’s estate may no longer be necessary. It may be possible to subject low-basis assets held in such an irrevocable trust to estate tax. The low-basis assets will then qualify for a basis step-up (increase) at the individual’s death potentially eliminating significant capital gains tax.

Please keep in mind that these examples are but a few situations that are affected by the provisions of the Act. A detailed review of an individual's specific estate plan is required to determine the effect the Act will have on that plan. If you have any questions regarding how or whether the Act will affect your estate plan please contact a member of Barrett McNagny's Estate Planning Group.