The enactment of the Tax Reform Act of 2017 is the most significant overhaul of our tax laws in over 30 years. The changes will be far reaching and have a significant impact on individuals, estates, trusts, and businesses in various ways. Some of these impacts are fairly obvious and others are not yet fully understood. These changes will sunset or expire after 2025, if not changed by a new Congress or administration, so planning is a challenge and certainty is elusive. Designing a flexible estate plan is necessary to address the challenges and uncertainties.
The most significant change for estate planning purposes is the doubling of the estate, gift and generation-skipping transfer tax exemptions from $5.6 million to $11.2 million per individual. A married couple may now pass more than $22 million to future generations without incurring any gift or estate tax. This changes the planning landscape for everyone at all asset levels. The impact of these increased exemptions is different for each person and family, and requires a thoughtful and detailed discussion with your advisors. Some issues to consider include:
First, for those who have assets greater than the new exemption amount, how, whether and when to make gifts to use these increased exemption amounts in light of the scheduled sunset after 2025 has no easy answer! The many factors to consider, include your level of wealth, family circumstances, and income tax considerations, to name just a few.
A second issue is whether existing wills or trust documents still reflect your wishes. It may have made sense to bypass your spouse in favor of children or grandchildren, or bypass your children in favor of grandchildren, when the estate and generation-skipping exemptions were $5.6 million, but maybe not since the exemptions have doubled.
A third consideration for married couples who are below the exemption amount is whether income tax planning is more important than estate planning. Because assets owned at death will continue to receive the Basis Step Up, or a new fair market value income tax basis, does it make sense to pass all assets to the surviving spouse, and is it still possible to protect those assets through the use of trusts?
Another issue is whether new trusts should include provisions to enable a disinterested trustee or trust protector to “force” inclusion of assets in the estate of a trust beneficiary whose assets are below the new exemption amount to obtain the Basis Step Up? Are there ways to build this same flexibility into an existing irrevocable trust?
And finally, do the higher exemption amounts provide planning opportunities for existing irrevocable trusts that are not exempt from the GST tax?
These questions barely scratch the surface of the many issues to consider. Scheduling a meeting with your estates and trusts lawyer should be a priority item on your 2018 to do list.