As we approach the end of the year, we thought you would find it useful to have the following summary of recent developments and updates that may affect your trust and estate planning.
1. Proposed federal tax law changes
As you may know, the House and Senate are working on revisions of the current federal estate, gift and generation-skipping transfer (GST) taxes as well as of other tax laws. Under both proposed tax plans, the current $5.49 million federal gift, estate and GST exemption amount would be doubled. In addition, a proposal from the House would eliminate the estate and GST taxes in their entirety in 2024. Given the current uncertainty, high-net-worth individuals have an increased tendency to “wait and see” what the future will bring before engaging in the estate planning process. Recognizing that waiting to plan for the future is not a good strategy for managing risk or for reducing possible transfer taxes that may nevertheless be assessed, we have been helping clients develop plans with significant built-in flexibility, in which the current payment of gift tax is avoided and a transfer tax in the future will be reduced and possibly eliminated. Additionally, it is important to note that because there is no indication that state estate tax laws (such as those of New York, New Jersey and Connecticut) will be changed, there remains a need to either revisit estate plans or engage in new estate planning to reduce or eliminate state estate taxes at death.
2. Estate and gift tax inflation adjustments for 2018
Assuming no changes to the federal tax laws as discussed above, the various exemption amounts for 2018 will be as follows:
Estate, gift and GST tax exemptions: The exemption amounts for estate, gift and GST purposes will increase from $5.49 million to $5.6 million.
Annual exclusion for gifts: The annual exclusion amount will increase from $14,000 to $15,000 per donee (or $30,000 if the donor is married and the donor’s spouse agrees to gift-splitting). The value of any gifts made within the annual exclusion amount does not reduce the exemption amount for federal gift and estate taxes.
Annual exclusion for gifts to foreign spouses: Although there is an unlimited gift tax marital deduction for spouses, such an unlimited deduction is disallowed if the spouse of the donor is not a U.S. citizen at the time of the gift. The annual exclusion amount for gifts to non-citizen spouses will increase from $149,000 to $152,000 in 2018.
3. Section 2704 regulations withdrawn
In response to the uproar by estate planning professionals in connection with the issuance of the August 2016 proposed regulations under Section 2704(b) of the Internal Revenue Code, which would have virtually eliminated valuation discounts applicable to intrafamily transfers of closely-held business interests, the Treasury withdrew the proposed regulations in their entirety. As a result, this valuable estate planning technique remains available for clients wishing to create, or transfer interests in, closely held business entities.
While interest rates remain low, the grantor retained annuity trust (GRAT) remains an attractive vehicle by which a donor may (i) transfer the appreciation on an asset over a term of years to family members without using any exemption from the federal gift tax and (ii) take back ownership of the property itself. Interest rates are slated to increase, thereby making GRATs an attractive near term estate planning option.
5. Estate planning revisited
As a reminder, it is advisable to review your estate planning documents every three to four years. If there are changes in your relationships with fiduciaries and beneficiaries, your financial or personal circumstances, or the tax laws, it may be beneficial to update your documents.