A CLOSER LOOK AT THE ESTATE PLANNING PROVISIONS OF THE NEW TAX LAW

  The primary focus of the so-called Tax Cuts and Jobs Act of 2017 (the New Act) is to reduce individual and corporate income tax rates, to eliminate many deductions and credits, as well as to enhance other existing tax breaks. One thing the New Act has not done is to repeal the longstanding federal gift and estate tax, However, it does temporarily double the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption. Estate Planning Provisions For the estates of persons dying, and gifts made, after December 31, 2017, and before January 1, 2026, the gift and estate tax exemption and the GST tax exemption amounts increase to an inflation-adjusted $10 million, or $20 million for married couples with proper planning (expected to be about $11.2 million and $22.4 million, respectively, for 2018). Without further federal legislation, the exemptions will revert to their 2017 levels (adjusted for inflation) beginning January 1, 2026. The marginal tax rate for all three taxes remains at 40%. This will create another “fiscal cliff” like we saw in 2010 and 2012 when the so-called “Bush tax cuts” would have expired without new legislation.  In both cases, at the last minute, Congress passed legislation to extend those cuts. It is expected that the increased exemption amounts will reduce the already quite small number of U.S. estates subject to estate tax by more than half. Due to the already high estate tax limits in recent years (over $5 million), many Americans already did not need to be concerned about the estate tax, but, nonetheless, estate planning is more than just tax planning. The many nontax issues that still need be considered include asset protection, care of minor and disabled children, family business succession, divorce, creditor and other matters. It’s also important to keep in mind that the exemptions are scheduled to revert to their previous levels in 2026 — and there’s no guarantee that a future administration won’t reduce the exemption amounts even further. As discussed below, however, the exemption increases certain planning opportunities that can help you shield your wealth against tax changes down the road. Looking Ahead The increased exemption amounts, even if temporary, can create a rare opportunity to take advantage of strategies for “locking in” those exemptions and permanently avoiding future transfer taxes. These include: Lifetime gifts. By using some or all of the increased exemption amount (now over $11 million) to make additional tax-free lifetime gifts, you can shield that wealth — together with any future appreciation in value — from taxation in your estate, even if smaller exemptions have been reinstated when you die. Keep in mind, though, that lifetime gifts, unlike assets transferred at death, aren’t entitled to a stepped-up basis. This can increase income taxes on any gain realized by the recipients should they sell a gifted asset. So, when considering lifetime gifts, it’s important to weigh the potential estate tax savings against the potential income tax costs. Dynasty trusts. For very high net worth families, such irrevocable trusts could allow substantial amounts of wealth to grow and compound free of federal gift, estate and GST taxes, providing tax-free benefits for your grandchildren and future generations. The longevity of a dynasty trust varies from state to state, but in California is limited to 90 years. Other Planning Options The New Act makes several other changes that may have an impact on estate planning strategies. For example: 529 (Education Savings) plans. The new law permanently expands the benefits of 529 plans. These plans, which permit tax-free withdrawals for qualified educational expenses, also offer some unique estate planning benefits. Contributions are removed from your estate even though you retain the right to change beneficiaries or get your money back. And you can bunch five years’ worth of annual gift tax exclusions into one year. So, for example, in 2018, when the annual exclusion is $15,000, you can contribute $75,000 to a plan ($150,000 for married couples) without triggering gift or GST taxes or using any of your exemptions. Under the New Act, beginning in 2018, tax-free distributions from 529 plans can be used for elementary and secondary school expenses, not just higher-education expenses, making them even more valuable. Charitable planning. The New Act also raises the adjusted gross income limitation for deductions of cash donations to public charities from 50% to 60% from 2018 through 2025. On the other hand, because fewer people will be subject to federal gift and estate taxes, charitable strategies designed to reduce those taxes will be less valuable from a tax-saving perspective. Review your plan These and other changes made by the New Act may have a significant impact on your estate planning strategies. Now may be a good time to have your existing plan reviewed by an experienced and qualified estate planning attorney.