Based on the Tax Cuts and Jobs Act (TCJA) that was signed into law last week, we wanted to provide our clients and friends of the firm an update on some of the details and planning opportunities with regards to estate and gift taxes.

Estate and Gift Tax Update

Doubling of the Lifetime Exemption: The Act doubles the estate and gift tax exemption for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. This is accomplished by increasing the basic exclusion amount provided in section 2010(c) (3) of the Code from $5 million to $10 million. (This also applies to the Generation Skipping Tax) The $10 million amount is indexed for inflation occurring after 2011. For 2018, this means the new exemption amount will be $11.2M per individual or $22.4M per married couple.

Sunset Feature:  Similar to some of the other individual tax provisions, the doubling of the exemption is set to expire and revert back to $5M as of 12/31/2025. Wealthy individuals and families should move quickly to take advantage of the higher exemption amount in case the amount is decreased or reverts back to $5M as scheduled.

Estate planning opportunities and review of wills and trust documents: It is common for wills and other estate planning documents (such as revocable trusts) to contain dispositions which reference the estate (and GST) exemptions that are in effect at death. These “formula” provisions would automatically adjust for changes in the exemption amounts.

While this may achieve a beneficial tax result, the temporary doubling of the exemptions may also cause unintended consequences to the overall estate plan. For example, a common plan is to leave the estate exemption to a bypass trust, and the balance for the surviving spouse, either outright or in a marital trust. For a $10 million estate, if death occurs in 2017 that would result in roughly half to the bypass trust and half to the spouse. However, if death occurs in 2018 to 2025, that would result in the entire estate being left to the bypass trust. This may not be the desired result of the original grantor and could necessitate changes to the underlying documents.

Wills and other testamentary documents should be reviewed to make certain they accurately reflect the Grantor’s wishes. Documents should continue to be drafted with flexible provisions that can be adjusted for future changes.

Lifetime Gift Planning: Lifetime gifts are often made in order to reduce the estate tax that would otherwise be incurred at death. While the doubling of the exemption may avoid the need for lifetime gifting for certain individuals, that may only be the case if death occurs before 01/01/2026. As a result, careful consideration should be given to making lifetime transfers during this eight year window. Discounting of closely held business assets is still an option and we can assist with completing a third party business valuation if needed to facilitate the gifting process.

In summary, the TCJA presents a unique opportunity for wealthy families to further protect their assets for future generations.

If you would like to discuss this or another topic related to your estate tax planning with one of our Legacy Tax team members, please contact Scott Robertson at srobertson@bvccpa.com.