Estate Planning Opportunities Created by the New Tax Law

The Tax Cuts and Jobs Act (“The Act”) passed by Congress and signed by the President at the end of last year included significant changes in the Estate and Gift tax provisions of the Internal Revenue Code that open planning opportunities for limited time. For clients looking to insure their estates take advantage of every opportunity it is now time to review whether more advanced planning strategies are appropriate.

With the adoption of the Act, Congress changed the Estate, Gift, and Generation-Skipping Transfer (GST) tax exemptions under the Internal Revenue Code. The prior law exempted the first $5 million (as adjusted for inflation in years after 2011) of transferred property for each taxpayer from Estate and Gift Tax. This allowed a married couple a total exemption of  $10.9 million of assets in 2017.

Under the new law, for estates of decedents dying and for gifts made during lifetime after December 31, 2017 and before January 1, 2026, the exclusion amount is doubled from $5 million to $10 million (again as adjusted for inflation occurring after 2011) and is expected to be approximately $11.2 million per person or $22.4 million per married couple in 2018. The Act does not make changes to the tax rates for Estate, Gift, and GST, which remain subject to a maximum tax rate of 40 percent. Additionally, the current basis step-up under Code §1014 for property inherited from a decedent remains in place.

Despite the early discussions regarding the Act, it is important to note that there is no provision in the final legislation for ultimate repeal of the Estate, Gift, or GST taxes, and the increased exemptions remain in place only until December 31, 2025, at which time they revert to the current $5 million level (indexed for inflation).  These circumstances open a significant, once in-a-lifetime opportunity for clients with estates above the above the exemption limits to protect more assets from taxation. Some clients may be tempted to take a wait and see attitude given that the new limits do not expire until December 31, 2025, but delaying this discussion comes at their peril as the tax legislation may be modified significantly if the 2018 midterm elections or 2020 Presidential election bring changes in the control of Congress and the White House. In addition, although death is inevitability, none of us knows when, so planning is important.

The tax changes, when combined with valuation discounting, open the door for strategies that can shield significant assets from Estate and Gift taxation through the use of direct gifts, gifts in trust, and gifts of business interests (such as family partnerships, LLCs and corporations). Such gifts will also shift future appreciation of the assets to children and grandchildren, who may also be in lower tax brackets for income tax purposes. It is also possible to make use of legislation adopted in 2017 by the Michigan legislature to create self-settled trusts which are likely to provide creditor protection and allow clients to take advantage of the higher exemptions. 

While clients may initially be reluctant to make larger gifts immediately, a review of the options and strategies to protect assets from Gift or Estate tax while still providing some control of the assets should be considered immediately. As always, the tax rules are complex and retaining attorneys experienced in complex estate planning is important because errors in implementation of sophisticated strategies can be very costly if done incorrectly.

Al and Matt