Effective January 1, 2018, the Tax Cuts and Jobs Act of 2017 (TCJA) reduces individual and corporate tax rates, eliminates a host of deductions and credits, enhances other breaks and makes numerous additional changes.
One thing the TCJA does not do is repeal the federal gift and estate tax, as originally contemplated by the House of Representative’s version of the bill. The TCJA does, however, temporarily double the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption, creating new estate planning challenges and opportunities.
For the estates of persons dying, and gifts made, after December 31, 2017, and before January 1, 2026, the gift and estate tax exemption and the GST tax exemption amounts increase to an inflation-adjusted $10 million, or $20 million for married couples with proper planning (expected to be $11.2 million and $22.4 million, respectively, for 2018). Absent further congressional action, the exemptions will revert to their 2017 levels (adjusted for inflation) beginning January 1, 2026. The marginal tax rate for all three taxes remains at 40%.
According to some estimates, the increased exemption amounts will reduce the number of U.S. estates subject to estate tax from approximately 5,000 to around 2,000. But just because the possibility of estate tax liability seems remote for most families, it doesn’t mean the end of estate planning as we know it.
For one thing, there are many nontax issues to consider, such as asset protection, guardianship of minor children, family business succession and planning for loved ones with special needs. Plus, it’s not clear how states will respond to the federal tax law changes. If you live in a state that imposes significant state estate taxes, many traditional tax-reduction strategies will continue to be relevant.
It’s also important to keep in mind that the exemptions are scheduled to revert to their previous levels in 2026 — and there’s no guarantee that a future administration won’t reduce the exemption amounts even further. As discussed below, however, the exemption increases planning opportunities that can help you protect your wealth against tax changes down the road.
Record-high exemption amounts, even if temporary, create a rare opportunity to take advantage of strategies for “locking in” those exemptions. These include:
Effectively planning for the GST tax is also critical. With an additional 40% tax on transfers to grandchildren or others that skip a generation, the GST tax can quickly consume substantial amounts of wealth. The key is to leverage your GST tax exemption, which will be higher than ever starting in 2018.
Let’s say you haven’t yet used any of your gift and estate tax exemption. In 2018, you transfer $10 million to a properly structured dynasty trust. There’s no gift tax on the transaction because it’s within your unused exemption amount, and the funds, together with all future appreciation, are removed from your taxable estate.
Most important, by allocating your GST tax exemption to your trust contributions, you help ensure that any future distributions or other transfers of trust assets to your grandchildren or subsequent generations will not be subject to GST taxes. This is true even if the value of the assets grows well beyond the exemption amount or the exemption is reduced in the future.
The TCJA makes several other changes that may have an impact on estate planning strategies. For example:
Many of these, and other, changes made by the TCJA may have a significant impact on your estate planning strategies. Consult with your tax advisor to review your estate plan in light of the new tax law to help ensure you’re taking full advantage of the opportunities the TCJA creates, and minimizing any downsides that may affect your family.
Contact Alane Boffa at aboffa@cohencpa.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.