The Tax Cuts and Job Act of 2017 (“TCJA”) made significant changes to the federal estate and gift tax laws impacting existing estate planning. Most notable is the increase in the amount an individual can shelter from federal estate tax (“FET”) from $5.6M to $11.18M per person. With minimal planning a couple can now transfer up to $22.4M to their heirs free from FET.
Sound too good to be true? Well, it might be. As with all “good things”, the increased exemption will come to an end. The new law has a sunset provision and the shelter amount will revert back to the $5.6M exemption level of 2017 (maybe adjusted for inflation) in just 8 years. And since the FET is a political hot potato, it is conceivable that a subsequent Congress could change or repeal the current law.
So, what are you to do? As with any change, you will need to look at your current estate plan (or lack of one) to make sure it still accomplishes your goals and make changes as needed. Here are some things to consider.
- Limited or No Estate Planning. Estate planning is much more than just taxes and what happens to your money when you die. A good estate plan addresses the issue of financial management, aging, incapacity, and death. Failing to plan sufficiently, exposes you and your family to court supervised guardianships, and sometimes surprising outcomes on distributions when you die.
- Existing Estate Plan. This may be the perfect time to update wills that have not been revised in several years to eliminate trusts based solely on FET. You may want to include or modify trusts for beneficiaries. Trusts can be used to address problems. They can provide protection from creditors and divorcing spouses, make provisions for children of a previous marriage or control over how beneficiaries inherit wealth. Trusts can be particularly important for families with spendthrift, mental illness and addiction concerns.
Income tax planning is becoming a more important element in estate planning than before. Consideration should be given to planning for a periodic stepped up basis for trust assets, reducing tax on subsequent sales.
Finally, previously established trusts or family entities primarily for the purpose of minimizing estate taxes may have served their purpose and consideration should be given to modifying them or dismantling the arrangement.
- Rethinking Gifting Strategies. Many clients are in the habit of making annual gifts that are exempt from gift tax, currently $15,000 per person per recipient per year ($30,000 for married donors). Individuals will want to consider whether making gifts during their lifetime is still the right estate planning strategy. If estate tax is no longer a concern, limiting gifts to the annual exclusion amount may no longer be necessary. In either case, special consideration has to be given to the income tax effect of lifetime gifts (loss of stepped up basis).
- Flexibility. While only a small fraction of U.S. estates will be subject to FET under the most recent tax reform, it is important to keep in mind that there have been three legislative changes to the FET exemption in the past twenty years. Make sure your estate plan provides a degree of flexibility to address the ever changing tax climate.
- Wealth. For our wealthiest of clients, the need for complex federal estate tax planning is still an important part of planning. You may want to review your FET exposure under the new rules. Most of the traditional wealth transfer strategies are still useful. You may want to utilize the current $11.18M lifetime gift tax and generation skipping tax exemption while available and take advantage of the increased exemption over the 2026 sunset exemption.
On the surface, the increase in the FET exemption may make it seem like the need for estate planning is less relevant than before. However, significant changes in the law is always a good reason to review your estate plan and make sure it provides some flexibility to respond to the ever changing estate tax law.
Stephanie Pahides Kalogredis concentrates her practice in Estate Planning and Estate and Trust Administration and Wealth Transfer and Succession Planning working primarily at the Bryn Mawr office of Lamb McErlane PC. email@example.com, 610.527.9200 x3.