It is always a good idea to review plans periodically to account for life changes (birth, marriage, death, financial, etc.). This year, the 2017 Tax Cuts and Jobs Act dramatically changed the federal gift, estate, and generation skipping transfer taxes. In light of these significant changes, it is even more important to revisit your estate plan, particularly if not reviewed in recent years.
- Gift, Estate, and GST Tax Exemptions. As discussed in our Tax Cuts and Jobs Act Resource Center blog, the 2017 Tax Act for gift, estate and GST tax exemptions are temporarily doubled from $5,000,000 to $10,000,000, and are indexed annually for inflation occurring after 2011. For 2018, the inflation adjusted exemption amount is $11,180,000. The increased exemption amounts sunset on December 31, 2025, and on January 1, 2026 the exemption amounts will revert to $5,000,000 indexed for inflation. The tax rate on transfers that exceed these thresholds was not changed and remains at 40%. Note that taxable gifts using exemption are those gifts that exceed the annual exclusion, are not subject to the marital or charitable deduction and not made to pay qualified tuition or medical expenses.
- Annual Exclusion. The annual exclusion from gift tax remains unchanged and continues to be adjusted annually for inflation. The annual exclusion increased to $15,000 per recipient in 2018. The annual exclusion excludes from the gift tax outright gifts to any number of individuals (and gifts to certain trusts).
- Portability. The 2010 Tax Act introduced “portability” which allows the unused estate tax exemption of the first spouse to die to be transferred to the decedent’s surviving spouse for his or her use during lifetime or at death, if certain requirements are met. The 2017 Tax Act did not change the concept of portability. Only gift/estate tax exemption amounts are portable. The GST tax exemption is not portable and therefore titling of assets is an essential element for a married couple’s estate plan that includes GST planning.
- Basis Step-Up. The 2017 Tax Act did not change the federal income tax basis adjustment of certain assets owned at death (the “step-up”) which can result in significant income tax savings on the sale of such assets.
How may these changes impact you?
- Some clients have plans that include transfers at death to beneficiaries based on the size of the estate tax exemption or GST exemption. Such plans may now produce an unintended result, passing significantly more assets to certain beneficiaries to the detriment or exclusion of other beneficiaries.
- The increased tax exemptions provide new planning opportunities for some clients, including significant lifetime gifts. Taking full advantage of these opportunities will require careful review, including close attention to the impact of possible future expiration of the increased exemptions.
- Lifetime trusts funded when the exemption amount was much lower as well as testamentary trust planning should be reviewed. In light of the compressed income tax brackets for a trust, it may be beneficial to cause assets to be included in the estate of the primary beneficiary where possible to achieve a step-up in basis or to terminate an old trust, if possible.
- Appointment of executors and trustees should be reviewed to determine if they still work or if they should be replaced with younger individuals, family members and/or trusted advisors, or whether a corporate fiduciary should be added for long-term trusts or removed where no longer considered necessary.
- Durable powers of attorney and health care documents should be reviewed to determine if the agents appointed still make sense and to ensure that the documents comply with current standards.
- Beneficiary designations for life insurance and retirement plans should be reviewed to ensure that the designations conform with your overall estate plan This is particularly important if a named beneficiary has died, is a minor or incapacitated, or if you are divorced.
If you have questions, or would like to discuss your Trusts + Estates planning, please contact Joan Agran at email@example.com or 610-341-1067.