Things to Consider or Reconsider As You Look at Your Estate

On December 22, 2017, the President signed a major change to federal tax law that contains many provisions affecting individuals, estates, and trusts. While the impetus behind the change was simplification, as some unnamed sage has noted, “taxes are never simple,” and such is the case with the new legislation. For estate plans, the effect of the new law will depend on each client’s unique goals and set of circumstance. Depending on the latter, tax provisions may need to be modified, or other types of planning implemented, to meet the client’s goals. For many clients, flexibility will be key.

What are the most important factors to consider under the new law?

  • The federal exemption amount has been temporarily raised. For years 2018 through 2025, the federal exemption applicable to estate and gift tax will double from prior law. Previously, the basic rate for estates at death or for gifts during life was $5 million, plus an inflation adjustment (for 2017, the exemption was $5.9 million). That amount will double to almost $11 million. For a married couple, this doubling is available for both spouses, resulting in what is anticipated to be a $22 million exemption (including inflation adjustments). The $11 million exemption reverts to the current levels of $5.9 million on January 1, 2026. This rule (as is true of tax law in general) is subject to modification by future legislation. The element of uncertainty is, therefore, still present for individuals or estates.
  • State estate taxes remain unchanged. For persons living in a state that levies a separate estate tax, the exemption from, and rate of, such tax may affect the estate plan. In Massachusetts, for example, the exemption remains at $1 million per person, and while a married couple may reap the benefit of two exemptions, each spouse must plan for it separately. In most instances, persons subject to this tax will need tax planning through trusts to maximize their state estate tax savings.
  • The “step up” in cost basis rules are unchanged. For capital gain purposes, the existing distinction remains between a “step up” in the basis of assets (which occurs at death, thus eliminating or reducing capital gain on estate assets sold after death) and a “carryover” basis for gifted assets (which means that the gift recipient faces the same or higher capital gain than the gift giver on the sale of gifted assets).
  • Previous trust planning should be reviewed. Long-term trusts may be funded in larger amounts (since the separate “generation-skipping” exemption also rises between 2018 and 2025, under the new law), and existing irrevocable trusts may need legal workarounds to maximize overall tax benefits.

How do these planning points affect you? For every client, the answer will be different. By evaluating certain issues we can help you make your way through the thicket of competing considerations.

First, the new rules may leave you in a position that allows your non-tax estate planning goals to receive additional emphasis without penalty. Some persons with estate plans with primarily tax-driven limitations imposed on their spouses or descendants may wish to revisit and modify their wills and trusts. Even existing “irrevocable” arrangements can be reviewed to see if there are solutions that make them more flexible.

Certain options available to independent trustees or trust protectors may be useful in such circumstances. We will note where trust structures used to achieve both tax and non-tax goals may be tweaked to broaden or narrow the range of beneficiaries, designate different trustees, accelerate or decelerate planned distributions, etc., without causing tax consequences that once gave pause.

If you live in a “separate estate tax” state, such as Massachusetts and Rhode Island, perhaps domicile change to a lower-tax state is a more compelling option for you, in light of the current changes. Or perhaps gifting excess high basis assets to descendants or other beneficiaries is now a more realistic possibility—this may be a particularly attractive option for an older surviving spouse. For other couples, gifting certain assets into a trust that is available on a discretionary basis to a long-term spouse may be a viable way to reduce the ultimate state estate tax burden without giving up full access to property.

For high-net-worth clients who still face exposure to the federal estate tax, “safe harbor” devices, such as grantor-retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs), may still have value, especially in the next few years, before the raised tax exemptions revert to 2017 levels.

For business owners, the range of options may be even broader. It is beyond the scope of this post to discuss the full range of tax-planning options available to business owners in addition to gifting, but we urge such clients to take advantage of our expertise in the course of an individual consultation with Burns and other members of your advisory team.

In short, this new tax law presents many options and opportunities for clients who are interested in the carefully considered transmission of wealth to future generations. Almost every estate plan can benefit from a second look, in light of the law’s momentous changes.