President Trump signed the Tax Cuts and Jobs Action (the “Act”) on December 22, 2017, implementing a new law that affects many taxpayers. This newsletter highlights some of the changes to the federal estate, gift and generation-skipping transfer tax laws, as well as other issues for consideration to my clients and friends regarding their estate plans.
Effective January 1, 2018, each individual has a federal exemption of $ 11.2 million, and married couples have a federal exemption of $ 22.4 million, before federal taxation is imposed at the flat rate of 40%. These lifetime exemptions will be adjusted annually for inflation, beginning in 2019. The increased gift, estate and generation-skipping tax exemptions are not permanent. This part of the Tax Act is scheduled to expire in 2026 and return to the prior exemption account, ($ 5,490,000 per individual). Changes in control of Congress and the Presidency could also terminate the increased exemptions. While it may make sense for some clients to take advantage of the increased exemptions to engage in additional estate planning, there is also a potential risk that the new exemptions will unintentionally negatively alter existing estate plans requiring important immediate changes.
In addition to the higher lifetime exemptions, the annual amount that can be gifted tax-free to an unlimited number of persons, the so-called annual exclusion, has increased from $ 14,000 to $ 15,000 per recipient per year.
This now has important consequences for many people. More individuals and married persons will now have estates that are no longer subject to the federal estate tax, at least until 2025. In addition to outright gifts, this could include transfers designed to generation-skipping tax exemptions, such as grantor “Dynasty Trusts” which remain extremely viable strategies under the Act. Individuals should review their plans to determine whether any formulas in their documents will have unintended consequences as a result of this new estate tax law.
The provisions of the new Tax Act present substantial new planning opportunities. Clients need to review their existing documents to determine the impact of the new law on their estate planning. Many estate plans for married couples use a formula to divide assets at the first death between a “marital” portion passing to or held in a trust for the surviving spouse and a “bypass” portion intended to bypass the estate of surviving spouse. What is your intention?
January 16, 2018