The President signed the Tax Cuts and Jobs Act of 2017 on December 22, 2017. This new law makes some very significant changes to the Internal Revenue Code, not all of which are readily apparent.
Exemption Change
Unlike the original House GOP bill, the final bill does not call for a repeal of the estate tax. So, with a Republican president and Congress unable to repeal the tax, it seems likely that now is the time to start planning for a tax that seems to have legs.
The good news is that the TCJA does eliminate the tax for all estates below $11.2 million since the new individual exemption is $11.2 million, $22.4 million for married couples. Not only will transfers up to that amount be made free of federal estate and gift tax, but $22.4 million is available for allocation of generation-skipping transfer tax exemption to transfers benefitting grandchildren and beyond. This increased exemption can also be used for lifetime gifts.
It’s important to note that most of the changes to individual taxes made by the new law are considered to be temporary, meaning that they’re set to expire on December 31, 2025. On January 1, 2026, the exemption amount will return to $5 million, as indexed for inflation from 2010 to 2026. That should be around $6.2 million per individual and $12.4 million for married couples. But, even if you die after 2025, the legislation seems to indicate that the gifts you made under today’s higher exemption levels will retain their benefit even if the estate tax exemption level falls in the future-no claw back. The IRS is supposed to promulgate new regulations to that effect.
Now, the bad news. The law was passed in the senate by a simple majority employing a procedure known as “reconciliation”. There was no 60 vote senate majority as in the bipartisan bill passed several years ago wherein the exemption was raised to $5 million per individual. What this means is that the new exemption can be reversed even before December 31, 2015 by the very same simple majority if both the President and the majority of both houses of Congress are in the Democrat side of the aisles.
As an aside, some legal pundits argue that it would be very unlikely for the President and the Congress in 2025 to reduce future estate tax exemption benefits. They feel that once a benefit has been conferred, it would be very difficult to reduce it. That runs counter to what might have happened had the Democrats won the presidency in 2016. It was suggested that the exemption was going to be reduced from $5 million back to $3.5 million. Unfortunately, the only certainty is uncertainty, and that is a major roadblock to rational estate planning. It is wrong, but, as they say, it is what it is. So, start your planning now and remain vigilant and aware of the potential changes that may (actually, will) come into play in the future.
Fresh Basis-No Change
The income tax basis of asserts acquired from a decedent is generally equal to each asset’s fair market value as of the decedent’s date of death. You may think of this as “fresh basis.” Assuming that the asset has accrued in value, this would represent a step-up in basis. If it has depreciated, then there would be a step-down in basis. Again, you need to be vigilant as to which assets should be transferred by gift and which by will. Generally, one would transfer a low basis assets by will (at the time of death) since the asset basis would incur a step-up thereby producing a smaller gain on a later sale. However, this retention concept may not apply if the asset is expected to grow dramatically between now and your demise. In that instance, one might now consider employing a GRAT (Grantor Retained Annuity Trust) or some other transfer technique. In this instance, the benefit of the gain occurring in the estate of the next generation might well outweigh the retention of that asset for its step-up. Remember, the step-up in basis is really a quid-pro-quo benefit for the asset being subject to estate taxation, and that benefit might not be sufficient reason to retain the asset.
State Estate Taxes Still Apply
Individuals with estates below the federal estate tax exemption, but who reside in decoupled states with estate tax exemptions lower than the federal estate tax exemption, or that have an inheritance tax, can still face state tax exposure. Also, states with estate tax exemptions tied to the federal amount may or may not reconsider these provisions due to the potential lost revenue.
As of 2018, states with a separate estate tax include Connecticut, D.C., Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. States that impose an inheritance tax include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Income Taxation for Trusts and Estates
Here are the new 2018-2025 taxation bracket for Trusts and Estates according to the Joint Explanatory Statement of the Committee of Conference
| Taxable income | Taxes Due |
|---|---|
| Not over $2,550 | 15% of taxable income |
| Over $2,550 but not over $6,000 | $382.50 plus 25% of the excess over $2,550 |
| Over $6,000 but not over $9,150 | $1,245 plus 28% of the excess over $6,000 |
| Over $9,150 but not over $12,500 | $2,127 plus 33% of the excess over $9,150 |
| Over $12,500 | $3,232.50 plus 39.6% of the excess over $12,500 |
In Conclusion
As previously mentioned, a successful estate plan relies heavily on a disciplined, periodic review approach. For families whose wealth is near or above the exemption levels, the utilization of the increased and immediately available gift and GST tax exemptions present an exceptional opportunity to implement substantial lifetime planning over the next few years, particularly dynastic planning through trusts and business succession planning for those with concentrated positions in closely-held businesses. And, depending upon the size of the estate, the use of gifts to fund life insurance acquisitions may eliminate the administrative hassles of annual gifts and the use of Crummey Powers.
We welcome the opportunity to explain how the new tax laws affect your estate planning, and how to get the most out of it. Please feel free to give us a call at The Unger Company Ltd., 212-755-4777.
