Reviewing Your Estate Plan is Critical Under the New Tax Law - The Unger Company | Estate Tax Planning | New York, Manhattan, Long Island, NY

Last month we told you quite a bit about the Tax Cuts and Jobs Act of 2017. However, we want to emphasize that despite the increased exemptions, you still need a well-thought-out estate plan, and here’s some primary reasons why.

To begin with, all of the legislation that affects individual taxes, including gift and estate taxes, is set to expire in 2025. But in truth, a new administration could also vote to lower the exemptions before that time. The second thing you must keep in mind is that your state exemptions may be much lower, so your estate plan must take that into account as well. And ultimately, estate planning is not just about taxes, protecting trust assets from creditors or from beneficiaries who are not fiscally responsible is quite often a priority above and beyond tax efficiency. Ultimately, a large exemption does not solve estate-planning issues. So coming in to revisit your existing estate plan is a must, because there may be some things that should now be changed in light of the new law.

Estate planning encompasses so much more than taxes. It should include thinking about flexible trusts to protect surviving spouses and children from creditors.

One of the things about the new exemptions is that they have twisted the formula that was being used for revocable trusts and wills. Most wills or revocable trusts include complex formulas that calculate the decedent’s remaining estate tax ex- emption amount and dispose of it accordingly. So if your estate had $4 million dollars and you signed a will or revocable trust back when the estate tax exemption was just $1 million, you might have set it up to give the maximum amount to a credit shelter trust that would not create an estate tax for your children with the remaining amount going to your spouse. In the case of a $4 million estate, that meant $3 million would go to your spouse and the rest to the children to share. But now, under the new exemption, the entire estate would go to the children with nothing outright to your spouse. One of the many reasons you must sit down with your estate planner and go over your documents to make sure the formulas still work in the current tax environment and that they remain aligned with your wishes. Around half the states have laws that permit you to merge an old trust into a new trust, which can help you repurpose the old trust by facilitating updating the distribution provisions in it.

Individuals can now make additional tax-free gifts to take advantage of the increased exemption amounts. Those of you who have wealth in excess of the new exemption amounts should take the opportunity now to make additional gifts to trusts that benefit your family. This is one way to leverage the additional exemption amount before the sunset period at the end of 2025.

Now is also the time to maximize your generation-skipping tax (GST) exemptions by making a late allocation of GST exemption into an existing non-exempt trust without having to make an additional cash gift. The Tax Cuts and Jobs Act of 2017 allows you the ability to transfer up to an additional $5,600,000 estimated amount, indexed for inflation.

This increased gift tax exemption can also be used with estate freezing techniques such as grantor retained annuity trust (GRATS) and sales to Irrevocable Grantor Trusts, especially for those of you who have significant wealth. The increased gift tax exemption can allow for increased amounts of property to be sold to the trust.

If you are likely to die before 2026, you should consider maximizing their ability to obtain step-up for assets for income tax purposes. This can be done through exercising “swap” powers in grantor trusts to return low basis appreciated assets to the estate of the trust’s grantor.

You should take a look at your charitable planning as well to make sure that tax and non-tax impact still aligns with your philanthropic intent. The Tax Cuts and Jobs Act of 2017 increases the deductibility limitation for cash contributions to public charities from 50% of Adjusted Gross Income to 60%.

Life insurance remains a tax efficient way to offset the bite of Transfer Taxes. When
held in a properly structured and administered life insurance trust the death benefit generally pays out estate tax and income tax free. The increased exemption may provide an opportunity to support policies that have been under funded or for which internal performance has been poor. Using the increased exemption to add cash to a life insurance trust, which can be used to purchase a new policy or be added to an existing policy to bolster its internal value, can do this. This technique can be especially useful with underfunded current assumption universal or variable universal life policies.

These are just a few of the ways the Tax Cuts and Jobs Act of 2017 can affect your estate planning. We welcome the opportunity to explain more in-depth how the new tax laws affect your specific 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.