An $11 Million Exemption?! Estate Planning Considerations and the Tax Cuts and Jobs Act of 2017

January 1, 2018 ushered in more than a new year for taxpaying Americans. Tax professionals of all areas of concentration continue to study the changes to the Internal Revenue Code enacted by the Tax Cuts and Jobs Act of 2017.  Most media reports have focused on the changes affecting income tax, such as doubling the standard deduction, eliminating personal exemptions, cutting back on certain deductions and adding a new treatment of “passthrough” income.  Few reports have addressed the one change in the federal estate tax:  doubling the exemption amount.  While this change is not nearly as exciting as the changes to the income tax, it does warrant consideration as taxpayers of varying degrees of net worth attempt to implement tax efficient estate plans.

Under the new law, individuals now have approximately $11 million of exemption before they are subject to federal estate tax. The “portability” of a spouse’s unused exemption has not been changed, which means that a married couple has a collective exemption amount of approximately $22 million.  Note, however, that the new law sunsets on January 1, 2026, with a reversion to the pre-2018 exemption amount thereafter.  So, what does one do?

Taxpayers whose net worth is above the new exemption amount should consider using the increased exemption amount as a further opportunity to continue moving value out of their estates. The use of irrevocable gift trusts, grantor retained annuity trusts (GRATs), qualified personal residence trusts (QPRTs), transfers to intentionally defective grantor trusts (IDGTs) and  family limited partnerships (FLPs) are still viable methods to move value (particularly rapidly appreciating assets) from one generation to the next by minimizing the sting of the estate tax.

Also, taxpayers subject to a state estate tax should determine whether the change in the federal law also increases the exemption at the state level. For example, Illinois has a fixed exemption amount of $4 million that is not indexed to the federal exemption amount.  Other states, such as Connecticut, Massachusetts, Minnesota, New Jersey, Oregon, Rhode Island, Vermont and Washington, also have exemptions significantly less than the federal exemption.  Delaware, Washington D.C., Hawaii, and Maine currently have exemption amounts that are indexed to the federal exemption amount.  Maryland and New York are set to have exemption amounts indexed to the federal exemption as of January 1, 2019.

Furthermore, taxpayers who are no longer affected by the estate tax due to the increase in exemption, but have previously implemented value-based estate planning techniques to remove value from their estates, should consider options to utilize the step-up in basis wherever possible. Assets that are considered part of a decedent’s estate at death receive a “step-up” in basis to the fair market value of such assets as of the decedent’s date of death.  Effectively utilizing this rule will be more important so as to minimize post-death capital gains tax.

Taxpayers with a net worth significantly less than both the federal and, if applicable, state estate tax exemptions should still be concerned with post-death income tax planning considerations, such as an effective use of the step-up rule to minimize post-death capital gains (as discussed above) and the transfer of income to taxpayers who are taxed at a lower income tax rate.

Finally, annual per donee exclusion gifting is still an option for making gifts to individuals. An individual may gift up to $15,000 per year to an individual without any gift tax implications.

Opportunity exists for planning at all levels and the implications of the increased federal estate tax exemption should be considered in the context of a taxpayer’s specific circumstances.

Trusts and Retirement Funds: Should They Meet?

A significant portion of wealth in an average estate typically exists in some form of qualified or non-qualified retirement plan.  Most people are generally aware of the common parameters governing their plans, such as contribution limitations, penalties for early withdrawal and so forth.  What most retirement plan participants overlook are the rules governing distributions after death.

Given that most estate plans include some form of trust agreement that contains the plan’s operative components, it is crucial to be aware of the requirements for trusts when they are named as a beneficiary of a retirement plan.  The article, “Designating A Trust As Retirement Beneficiary,” offers a very concise introduction to these requirements.  As always, professional counsel is imperative when addressing specific concerns about your estate plan.

Clarity Is Key When Re-Registering Assets Into Trust

Recently, an Illinois appellate court decision held that a transfer of real property could be effectuated when the settlor of a trust indicated in the trust instrument that the property was a part of the trust corpus.  See my article, Do You Really Need A Deed?, for a summary of the court’s opinion.

Trusts and Tax Planning

Trusts have become a very common element to modern estate planning. Clients are often confused as to the different types of trusts available for various planning needs. One major distinction among the types of trusts is whether it is revocable or irrevocable. This distinction may have significant income and gift tax consequences that need to be explored in the planning process.
See this brief article to begin exploring the income tax consequences of creating an irrevocable trust.