Estate and Gift Tax Highlights of the 2017 Tax Cuts and Jobs Act

The 2017 Tax Cuts and Jobs Act (the “Act”) became law on December 22, 2017, with most provisions becoming effective on January 1, 2018. Some provisions are permanent, while others expire on January 1, 2026. Most significant for gift and estate tax purposes is that the Act doubles temporarily the basic gift and estate tax exclusion amount and the generation-skipping transfer tax (“GSTT”) exemption amount. Taxpayers may want to consider:

• revising their current estate plan to minimize future income tax exposure; or
• engaging in aggressive estate planning techniques to exploit the temporary increase in the basic gift and estate tax exclusion and GSTT exemption amounts.

Gift and Estate Tax in 2018

For 2018, an individual will be able to make cumulative transfers of approximately $11.18 million (approximately $22.36 million for a married couple) during their lifetime or at death without incurring gift or estate tax. Amounts that exceed the exclusion amount will be subject to a federal gift or estate tax at a rate of 40%.

Generation-Skipping Transfer Tax in 2018

The GSTT is an additional tax that is generally imposed on transfers from a grandparent to a grandchild or from an individual to an unrelated person who is more than 37.5 years their junior. For 2018, an individual may transfer approximately $11.18 million (approximately $22.36 million for a married couple) without incurring a GSTT. This GSTT exemption is separate from, and in addition to, the estate and gift tax exclusion. Amounts that exceed the GSTT exemption amount will be subject to a GSTT at a rate of 40%.

Updating Your Current Estate Plan

Under the Act, commentators estimate that only about 1,800 of 2018 decedents’ estates are projected to pay estate tax, down from about 5,000 estates in 2017. Because most estates will not be subject to estate tax, we recommend that taxpayers review their estate plans to determine whether such plans still serve their intended goals. Income tax benefits may accrue with a revised estate plan that are not possible under the current plan.

For example, if a taxpayer’s current plan provides for the automatic creation of a Bypass Trust (also known as a “Decedent’s Trust” or “Credit Shelter Trust”) on the death of the first spouse, the assets allocated to such trust would not receive a tax basis adjustment on the death of the surviving spouse. This taxpayer could restructure their plan to ensure the share of the estate of the first spouse to die receives an income tax basis adjustment on the death of the surviving spouse. Such a basis adjustment could potentially eliminate some, if not all, of the income tax generated by a subsequent sale of such assets.

Aggressive Estate Planning Techniques

Under the Act, the doubled exclusion and GSTT exemption amounts are set to expire on January 1, 2026. Unless legislation is passed making the amounts permanent, the exclusion and GSTT exemption amounts will revert to $5 million, adjusted for inflation from 2011. Taxpayers may want to consider utilizing one or more aggressive estate planning techniques to take advantage of the increased exclusion and GSTT exemption amounts in case the increased amounts expire in 2026. For example, taxpayers could create a qualified personal residence trust for a vacation home to leverage their gift tax exclusion. Taxpayers could also establish a grantor trust to avoid capital gain tax while transferring future appreciation on securities, a closely held business interest or real estate. These trusts are designed to reduce estate tax exposure while distributing assets to the intended beneficiaries.

We would be pleased to discuss with you the estate planning options you may want to adopt in response to the change in law.

Please contact us if you have any questions at 925-253-1717 or  info@HBH.law