The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017, and became effective January 1, 2018 (the “Act”). While most of the Act is made up of provisions that change individual and business income taxes, there were some significant changes to the Estate Tax laws.
We are still awaiting guidance from the IRS with respect to some of the provisions; however, this post will inform you with respect to some of the major changes in the Estate Tax laws and my initial thoughts on some planning opportunities. Note that as these new laws are analyzed and examined, it is anticipated that more planning opportunities will develop and I will update this blog as to such opportunities once further developed. The main purpose of this post is to advise you of the changes made and to give you a starting point when considering your own individual planning.
The Estate Tax is the tax that is assessed against an individual’s total estate and all assets included in such estate when that individual passes away. The Estate Tax rate of 40% did not change. However, the most significant change was the Estate Tax exemption amount doubled. Under the old law, the exemption amount was set to increase to $5,490,000 per individual and $11,180,000 per married couple in 2018; instead, the Act increased this exemption amount to $11,180,000 per individual and $22,360,000 for married couples. Therefore, if an individual passes away with total estate assets valued at less than that exemption amount (including all lifetime gifts), no Estate Tax would apply on such individual’s estate.
This significant increase in the Estate Tax exemption amount presents a number of planning considerations:
- If an individual already used part or all of their Estate Tax exemption as part of their planning under the old law, that individual now has at least an additional $5,000,000 in exemption that they could now use in their planning.
- Whether or not an individual has used any of their Estate Tax exemption amount already, much consideration should be given as to whether to use some or all of the exemption now. This is because one major piece of this new Act is that it sunsets in year 2026. This means that if no action is taken by Congress before 2026, the Estate Tax exemption amount will go back down to the old law exemption amounts (which would be approximately $6,000,000 per individual in 2026 with inflation adjustments). Thus, it is important to at least consider taking advantage of this increased exemption now. However, the question then becomes, if this new increased exemption amount does sunset in 2026, what will Congress do about individuals who have used more than that new lower exemption amount (i.e., the $6,000,000 exemption)? Will they be grandfathered in and those assets above that amount still not be subject to Estate Tax? Will the amount above the new lower exemption amount be brought back into their estate when they pass away and thus be subject to Estate Tax? These are some of the questions we are still looking to the IRS for guidance on.
- This new Act retains the right of the surviving spouse to “port” over the deceased spouse’s unused exemption amount. What this means is if one spouse passes away without using their $11,180,000 exemption, the surviving spouse can elect to “port” over that $11,180,000 exemption in order to retain the benefit of that exemption when that surviving spouse later passes away. This can be extremely beneficial and must be considered as part of every estate plan and when a spouse passes away. Our thought is that even if the exemption amount sunsets in 2026, that this “ported” amount would still be allowed (if a spouse passed away between 2018 and 2026), even at the higher exemption amount. However, there has not been any IRS guidance on this yet. Furthermore, portability should also be used in conjunction with an exemption trust to allow the surviving spouse maximum flexibility.
- All of the planning tools that were at our exposure before are still available; the impact of such planning may have changed though. Very briefly and generally, the benefits and risks of Estate Tax planning at this conjuncture are as follows:
Benefits of Estate Tax Planning
- Using the Estate Tax exemption while it is available at this increased amount and before it goes away (possibly in 2026 or even sooner if other political changes occur) can be a substantial benefit to transfer more out of your estate tax-free.
- Any appreciation on such assets after being transferred will also be out of your estate, providing even more Estate Tax savings.
- Not only does it lower the Estate Tax at death, it can also lower your income taxes if you are no longer receiving the income from those assets after you gift them away.
Risks of Estate Tax Planning
- We don’t know what will happen when the new Act sunsets in 2026, if that happens. Will the IRS conclude that any amount in excess of the lower exemption amount comes back into your estate? If that happens, will your estate have enough left to even pay the Estate Tax due?
- If planning is done, what exemption does it use if you give away less than the future sunset exemption amount (which we believe will be approximately $6,000,000)? For example, if you give away $4,000,000 when the exemption amount is the current $11,180,000 and then later the exemption goes down to $6,000,000, do you only have $2,000,000 of exemption left ($6,000,000 new exemption minus $4,000,000 gifted) or $6,000,000 ($11,180,000 old exemption minus $4,000,000 gifted, but since over the current $6,000,000, capped at $6,000,000)?
- For any assets in your estate at your passing, such assets receive a step-up in basis, which means your beneficiaries will not pay capital gain tax on any appreciation up until the date of death. However, for any assets transferred out of your estate, your beneficiaries lose the benefit of the step-up in basis on such assets (i.e., if the asset is sold, the beneficiary will pay capital gain tax on all appreciation). Thus, this loss of the step-up in basis and the assessment of the capital gains tax needs to be weighed against the Estate Tax.
- What does the future hold? What will the value of the assets in your estate be when you pass away? Markets can change. What will the Estate Tax law in effect be when you pass away? Political turbulence and changes have this Estate Tax law in a constant flux.
My hope is that this information is helpful and gives you some ideas to consider.
© 2018 Matthew D. Brehmer and Crummey Estate Plan.