Private Business Counsel

In my January 12, 2018 blog, in which I addressed the Tax Cuts and Jobs Act[1] which became effective January 1, 2018, I reviewed some of the changes affecting the federal estate and gift tax – primarily the doubling of the exemption to $11,180,000 per individual which will expire on December 31, 2025.  In this second blog on the Act, I discuss some planning opportunities presented by the Act.

Individuals Who are Subject to Federal Estate Tax

For individuals who are likely to be subject to federal estate tax after 2025 when the federal estate tax exemption reverts to $5,490,000 as adjusted for inflation (some of whom will also be subject to federal estate tax if they die between 2018 and 2025 when the exemption per individual will be at least $11,180,000 per individual), the doubling of the exemption provides them the opportunity to make large gifts to family members – or better yet, to trusts for family members – in order to consume the increased exemption.  As with all gifting, the primary benefit of the gift is removing from the donor’s federal taxable estate the appreciation on the gift between the date of the gift and the date of death of the donor (or, if the donor is married, the date at death of the later to die of the donor and his or her spouse).  There are numerous discounting techniques which reduce the value of these taxable gifts in order to leverage the exemption.

Some married couples will want to have their cake and eat it too – meaning they will want to make gifts but retain some access to the gifted funds.  One spouse can create a “spousal access trust” which gives the trustee the discretion to make distributions to the other spouse.  Reciprocal spousal access trusts present a problem, especially if they are created at the same time, so if both spouses want access you should consult with counsel to address that issue.

While most commentators believe that for donors who make large gifts between 2018 and 2025 and who die after 2025 those gifts will not be “clawed-back” to the donor’s taxable estate and made subject to federal estate tax, we will not know for sure until the IRS issues regulations.

Step-up in Basis Remains

Because the step-up in basis for all assets (other than retirement accounts and other items of “income in respect of a decedent”) remains in effect, trusts, including trusts to be created under wills or revocable trust agreements, should be drafted to include one or more of the array of techniques which provide the option to achieve a step-up in basis in trust assets at a beneficiary’s death.  For example, an independent trustee may be given the right to grant to a beneficiary a “general power of appointment” over the trust property, or to trigger the “Delaware tax trap” in order to achieve the basis step-up.

Simplifying Estate Plans for Clients Not Subject to Federal Estate Tax

As was the case when the exemption first increased to $5,000,000 at the end of 2010, for many married clients with shared testamentary goals, wills and revocable trust agreements which include formula marital deduction provisions (typically a marital trust and a bypass or credit shelter trust) can be simplified to an outright gift of all assets to the surviving spouse at the first death.  Many of these clients can simply title all assets jointly between the spouses and make the other spouse the primary beneficiary of life insurance and retirement accounts.  Wills and trusts can include provisions such as a disclaimer trust for the benefit of the surviving spouse — which the surviving spouse is given the option to create at the first death — to address any future reduction in the estate tax exemption and to provide the option to take advantage of other benefits of trusts, such as keeping assets within the family.

Some estate planning techniques which are “in operation” can be unwound or adjusted.  Irrevocable trusts which have outlived their usefulness might be terminated if state law allows.  A client who has sold a business or real estate to an irrevocable grantor trust (sometimes called an “intentionally defective grantor trust” or “IDGT”) in exchange for a promissory note, might make a gift to the trust in an amount equal to the balance due on the note so that the note can be paid-off.  Similarly, any loan to a family member can be satisfied by the lender making a gift to the borrower equal to the outstanding amount of the loan which the borrower can then repay to the lender.

Future Changes to the Law

Tax law is always a moving target.  With a change of administration in Washington, or in control of Congress, may come a reduction in the amount of the estate tax exemption.  As with all planning, practitioners should structure trusts and other estate planning vehicles with as much built-in flexibility as possible to address the full array of possible future changes.  An important goal is to avoid at all costs estate planning “buyer’s remorse.”

The planning opportunities under the new law are limitless – and tricky.  Be sure you consult with your tax advisor or estate planning counsel to explore your options fully.

[1] The actual final name of the Act is “An Act to Provide For Reconciliation Pursuant to Titles II and IV of the Concurrent Resolution on the Budget for fiscal Year 2018”