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Tax & Estate Planning
Estate planning tips for the new tax law
KEY TAKEAWAYS
- A doubling of the federal exemptions for estate, gift and generation-skipping taxes to $11.2 million from $5.6 million is the biggest change.
- Reforms mean a married couple can effectively transfer $22.4 million without paying estate, gift or generation-skipping taxes.
- Exemptions are indexed for future inflation, but revert back in 2026 to the current exemption amounts (adjusted for inflation).
Congress’ major overhaul of the U.S. tax code brings important changes for taxpayers and corporations. But it also raises new considerations for advisors when it comes to estate planning.
Two areas specifically jump out with important planning opportunities between advisors, clients and tax professionals:
Opportunity #1: Take advantage of the increased lifetime exemption.
For clients with “plenty of surplus,” a lifetime gift can make a great deal of sense. Making lifetime gifts now allows clients with a net worth that vastly exceeds their spending to take advantage of the new law. There’s no hard and fast number that indicates when a client has “plenty of surplus.” But that would be a client with well in excess of $11.2 million individually or $22.4 million as a married couple.
Action items: Consider all the typical factors when planning for a gift, including the:
- Financial and emotional effects of the gift on the donor and beneficiary.
- Trade off of gifts, which carry over the cost basis, as opposed to the step-up basis when retaining assets at death.
- Vehicle for the gift. That includes the drawbacks and benefits of outright gifts versus gifts to a trust, grantor or non-grantor trust or dynasty trust).
Beware: Claw backs. Take special care with clients — likely to live beyond 2026 — who make large gifts. There’s a potential situation where a client makes a gift with the available gift exemption ($11.2 million in 2018), who may still need to pay estate tax at the time of death. That’s due to the fact the gift exemption reverts back to $5.6 million in 2026. Congress left this inconsistency to the Internal Revenue Service to clarify.
Opportunity #2: Closely examine estates of $22.4 million and higher.
Clients’ estate plans should be reviewed with tax professionals on an ongoing basis. But a tax analysis is especially important — given the law changes — with clients who are married and have an estate value in the range of $22.4 million.
This level of assets, which would be reserved for a small number of clients, is where the greatest value can be created from the new tax law. An estate planning attorney should review the impact of the increased exemption on existing estate plans.
Beware: Disruption of the balance between trusts. The higher exemption can create unintended consequences for estates, including:
- Unexpected reduction in what a spouse would receive. The increased exemption could change the math for married couples in what gets allocated between the exemption share and the marital share. Typically, at the time of the first death of a spouse, the estate is divided between the exemption share and the marital share. The exemption share receives up to the exemption amount and the rest goes to the spouse. With the exemption amount increasing to $11.2 million in 2018 from $5.6 million, this means a smaller amount could be transferred to the spouse. It’s important to flag this with the estate planning attorney and make sure it’s what the client wants.
- Generation-skipping plans going out of balance. Another situation can arise on the death of the second member of the couple. The higher exemption amount could affect how much of the estate is divided between generation-skipping exempt and non-exempt trusts for children and grandchildren.
Action items:
What should advisors do? Use the tax law changes as an opportunity to re-engage with clients about estate plans. You might consider:
- Proactively reaching out to clients about how increased exemptions affect gift planning and existing estate plans.
- Network with clients’ estate planning attorneys to determine steps to take.
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