The Tax Cuts and
Jobs Act passed Congress on December 20, 2017 and was signed into law by the
President on December 22, 2017 (the enactment date) and is generally effective
for tax years beginning after 2017. This
is the eighth and last in a series of articles reviewing some of the more
important changes. This post deals with
the changes to estate, gift, and generation-skipping transfer taxes.
Each person has
a lifetime basic exclusion that exempts a certain amount from gift, estate, and
generation skipping transfer tax. The gift
and estate basic exclusion amounts are unified, but the GSTT basic exclusion
amount is independent. Most taxpayers
seek to preserve the basic exclusion amount until death by limiting gifts to
the annual gift tax exclusion amount ($15,000 for 2018 gifts) and by using
valuation discounts and advanced planning techniques. On the other hand, wealthy taxpayers are
likely to make gifts before death that consume the basic exclusion amount to move
future appreciation out of their estates.
The new law
doubles (approximately) the basic exclusion amount from $5.6 million per person
to $11.18 million for gifts made or deaths occurring in 2018. This amount is indexed for inflation after
2018 through 2025. In 2026, the basic
exclusion amount is cut in half back to the $5.6 million amount as further
indexed for inflation after 2018. The new
law preserves the current law “step-up” (or step-down) in income tax basis of
assets owned at death. Certain deferred
income assets do not receive a basis step-up such as 401(k)s or IRAs.
Implications and
planning considerations for the increased basic exclusion amount:
· Wealthy individuals who are or will be subject to
estate tax should consider making gifts of appreciating assets up to the new
higher exclusion amount as soon as possible.
Early gifting transfers more value out of the estate vs. waiting to make
the gift in later years. There are
several giving techniques that can leverage the use of the increased basic
exclusion. While an explanation of the
techniques is beyond the scope of this post, such techniques include sales to
an intentionally defective grantor trust, grantor retained annuity trusts,
charitable lead annuity trusts, discounting the value of business ownership
interests, and irrevocable life insurance trusts.
o For those who have already used these techniques in
the past, consider strengthening the tax and economic bona fides of the current
structure by gifting more property into the arrangement.
· There could be a mismatch in exclusion amounts if a
person gifts the temporarily high exclusion amount and then dies when the
amount of the estate exclusion drops under the sunset provision. The new law directs Treasury to issue
regulations regarding this difference. Some
experts believe that this direction is intended to prevent a “claw-back” of the
excess gifting amount at death.
· Those having estate values less than the temporarily
high basic exclusion amount (with husband and wife added together), but more
than the old law exclusion amount, should consider waiting until near the
sunset date to make gifts of appreciated property. If there is a death while the exclusion is high,
there would not be an estate tax and the heirs would receive an income tax
basis step up. Otherwise, if the property
is gifted and then death occurs before the sunset date, the income tax basis would
carry over (and therefore the capital gain tax also) to the recipient of the
gift. Gifted assets do not receive an
income tax basis step-up.
· Examine your current estate planning documents that use
formulas referencing the basic exclusion amount. Depending upon the size of the estate, everything
could end up in a credit shelter trust. Benefits
for a surviving spouse are often more restrictive in a credit shelter trust
than in a marital trust, and this may be particularly true in second marriages. Such an outcome may not reflect the
intentions of the decedent.
· Think twice about whether the default estate plan of
using a credit shelter trust should be use in your estate plan. Individuals whose estates are no longer
taxable under the new law may not want a credit shelter trust, but rather only
a marital trust such as a QTIP trust.
The reason why is that upon the death of the surviving spouse, the
assets held in the credit shelter trust do not receive a step-up in basis at
the second spouse’s death, whereas the assets in the marital QTIP trust do
receive a basis step up. However, under
Rev Proc 2016-49, the IRS has authority to disregard a QTIP election if it isn’t
necessary to reduce the decedent’s estate tax.
But the IRS will honor a QTIP election if it is made in conjunction with
a portability election. A portability
election transfers any unused basic exclusion amount of the first spouse to die
to the surviving spouse. The choice
between a credit shelter trust and a QTIP trust does not have to be an
either/or decision. A Clayton-contingent
QTIP trust provision in the estate plan creates postmortem flexibility to
choose how to allocate estate assets between the two trusts.
· Examine prior gifting to family LLCs or irrevocable
trusts. Assets in these gifting structures
will not receive a full income tax basis step up at death. Can or should the structures be modified to
enable estate inclusion to gain a basis step up? Does the trust have a power that allows the
trustee to substitute outside high basis assets for inside low basis assets?
· Examine life insurance purchased to pay estate
tax. Does the policy still make
sense? Can the premiums be stopped, and
the policy adjusted? Can the policy be
repurposed for other needs? Before dropping
an insurance policy, be sure to consider the temporary nature of the increased
basic exemption, and the possibility of adverse estate tax law changes when
political power shifts in the future.
· Should a gift of the increased exclusion be made to an
irrevocable life insurance trust to avoid the need for future premium gifts and
Crummey notices?
Making sound and
lasting financial and estate plans is difficult when tax laws are temporary and
political power and philosophies swing back and forth. But don’t let the temporarily high exclusion
amount lull you into inaction. Even an
80-year-old person has a nearly 50% probability of surviving another eight
years, past the 2025 sunset date.
Therefore, a review of your current estate and financial planning goals
and plans is advisable.
