Background Overlay

VantagePoint
Newsletter

Estate Planning Opportunities Arise with the New Tax Cuts and Jobs Act Law Now in Place

While the new Tax Cuts and Jobs Act of 2017 (TCJA) reduces individual and corporate tax rates, eliminates many deductions and credits, and enhances several other breaks, it does not repeal the federal gift and estate tax.  It does, however, temporarily double the combined gift and estate tax exemption and the Generation-skipping Transfer (GST) tax exemption, creating new estate planning challenges and opportunities you’ll want to consider.

Estate Planning Considerations

For the estates of persons who have passed away or for 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 (expected to be $11.2 million and $22.4 million, respectively, for 2018). The exemptions are also anticipated to revert to their 2017 levels (adjusted for inflation) beginning January 1, 2026. The marginal tax rate for all three taxes remains at 40%.

According to some estimates, the increased exemption amounts will reduce the number of U.S. estates subject to estate tax from approximately 5,000 to around 2,000. Just because the possibility of estate tax liability seems remote for most families, however, doesn’t signal the end of estate planning as we know it.

There are many non-tax issues to consider, such as asset protection, guardianship of minor children, family business succession, and planning for loved ones with special needs, for example. Plus, it’s not clear how states will respond to the Federal tax law changes. If you live in a state that imposes significant state estate taxes, many traditional tax-reduction strategies will continue to be relevant.

It’s also important to keep in mind that the exemptions are scheduled to revert to their previous levels in 2026 — with no guarantee that a future administration won’t reduce the exemption amounts even further. As discussed below, however, the exemption increases estate planning opportunities that can help you protect your wealth against eventual tax changes that may occur.

Planning Opportunities

Record-high exemption amounts, even if temporary, 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 to make additional tax-free lifetime gifts, you can preserve that wealth — together with any future appreciation in value — from taxation in your estate, even if smaller exemptions have been reinstated at the time you pass away.

Keep in mind, though, that lifetime gifts, unlike assets transferred at the time of 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. In this way, when considering lifetime gifts, it’s important to weigh the potential estate tax savings against the potential income tax costs.

Dynasty trusts. Now may be an ideal time to establish a dynasty trust. These irrevocable trusts 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 it’s becoming more common for states to allow these trusts to last for hundreds of years or even in perpetuity.

Avoiding the GST tax is critical. Carrying with it an additional 40% tax on transfers to grandchildren or others that skip a generation, the GST tax can quickly consume substantial amounts of wealth. The key to avoiding the tax is to leverage your GST tax exemption, which will be higher than ever starting in 2018.

For example, if you haven’t yet used any of your gift and estate tax exemption, you may wish to transfer $10 million to a properly structured dynasty trust in 2018. The benefit of this is that there’s no gift tax on the transaction because it’s within your unused exemption amount. Additionally, the funds, together with all future appreciation, are removed from your taxable estate.

Most importantly, by allocating your GST tax exemption to your trust contributions, you ensure that any future distributions or other transfers of trust assets to your grandchildren or subsequent generations will avoid GST taxes. This is true even if the value of the assets grows well beyond the exemption amount or the exemption is reduced in the future.

Other Considerations

The TCJA makes several other changes that may have an impact on estate planning strategies. For example:

529 plans. The new law permanently expands the benefits of 529 college savings 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. You can also 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 TCJA, beginning in 2018, tax-free distributions from 529 plans can be used not only for higher education expenses, but also for elementary and secondary school expenses, making them even more valuable.

“Kiddie” tax. The TCJA also makes an important change to the “kiddie” tax. One popular estate planning technique is to transfer investments or other income-producing assets to your children to take advantage of their lower tax brackets. The kiddie tax makes this difficult to do. Under pre-TCJA law, it taxed all but a small portion of a child’s unearned income at the parents’ marginal rate (if higher), defeating the purpose of income shifting. The kiddie tax generally applies to children age 18 years old or younger, as well as to full-time students age 19 to 23 (with some exceptions).

The TCJA presents greater challenges to executing the kiddie tax effectively by taxing a child’s unearned income according to the tax brackets used for trusts and estates, which are taxed at the highest marginal rate (37% for 2018) once 2018 taxable income reaches $12,500. In contrast with all other filers, for a married couple filing jointly, the highest rate doesn’t kick in until their 2018 taxable income tops $600,000. In other words, in many cases, children’s unearned income will be taxed at higher rates than their parents’ income.

Charitable planning. The TCJA raises the adjusted gross income limitation for deductions of cash donations to public charities from 50% to 60% beginning in 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 Estate Plan

These and other changes made by the TCJA may have a significant impact on your estate planning strategies. If you are interested in reviewing your estate plan in light of the new tax law to ensure that you’re taking full advantage of the opportunities the TCJA creates, and minimizing any downsides that may affect your family, please contact your Untracht Early advisor.

PLEASE READ THESE TERMS AND CONDITIONS OF USE CAREFULLY. THIS IS A LEGAL CONTRACT.

Acceptance of Terms of Use

The Untracht Early LLC (UE) client portal is offered to you on the condition of your acceptance of the terms, conditions and notices contained herein. By using the portal you agree to these terms and conditions. If you are not a client or authorized employee of UE, any use by you of the portal is prohibited.

Description of Service

The portal provides UE’s clients with access to information displayed on the portal for inquiries and deliveries of documents and communications for their account only. The information, documents and communications on the portal are provided as a convenient resource to clients, their attorneys, agents and other designated representatives (collectively, “Agents”) and may be used for informational purposes only for their account. To the extent you wish to authorize any Agents to access your account, you must sign and return the form of Authorization set forth below.

User Password and Security

Using the portal and its related services requires the use of a password and a user name. The confidentiality of your password and account is your responsibility. Any activities that occur under your account either by you or your Agents are your responsibility. You agree to notify us immediately of any unauthorized use of your account or any other breach of security. It is prohibited to use anyone else’s account without the express permission of that account holder.

Accuracy of Content and Liability Disclaimer

UE will strive to use reasonable efforts to include accurate and updated information on the portal; HOWEVER, YOU UNDERSTAND AND AGREE THAT UE IS UNDER NO OBLIGATION TO DO SO AND NEITHER UE NOR ITS SUPPLIERS, AGENTS OR REPRESENTATIVES MAKE ANY REPRESENTATION OR WARRANTY ABOUT THE SUSTAINABILITY, RELIABILITY, AVAILABILITY, TIMELINESS, AND ACCURACY OF THE INFORMATION, SOFTWARE, DOCUMENTS AND COMMUNICATIONS CONTAINED ON THE PORTAL FOR ANY PURPOSE TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW. ALL SUCH INFORMATION, SOFTWARE, DOCUMENTS AND COMMUNICATIONS ARE PROVIDED “AS IS” WITHOUT WARRANTY OR CONDITION OF ANY KIND. UE, AND ITS SUPPLIERS, AGENTS AND REPRESENTATIVES HEREBY DISCLAIM ALL WARRANTIES AND CONDITIONS WITH REGARD TO SUCH INFORMATION, SOFTWARE, DOCUMENTS AND COMMUNICATIONS, INCLUDING WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NON-INFRINGEMENT.

TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL UE, OR ITS SUPPLIERS, AGENTS OR REPRESENTATIVES BE LIABILE FOR ANY DIRECT, INDIRECT, PUNITIVE, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES OR ANY OTHER DAMAGES WHATSOEVER, INCLUDING WITHOUT LIMITATION, DAMAGES FOR LOSS OF USE, DATA OR PROFITS, ARISING OUT OF OR IN ANY WAY CONNECTED WITH YOUR OR YOUR AGENTS’ USE OR THE PERFORMANCE OF THE PORTAL, WITH THE DELAY OR INABILITY TO USE THE PORTAL OR RELATED SERVICES, WHETHER BASED IN CONTRACT, TORT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE, EVEN IF UE OR ITS SUPPLIERS, AGENTS AND REPRESENTATIVES HAVE BEEN ADVISED OF THE POSSIBILITY OF DAMAGES. CERTAIN STATES DO NOT PERMIT TYPES OF THESE LIMITATIONS, SO THE ABOVE LIMITATIONS MAY NOT APPLY TO YOU. IF YOU ARE DISSATISFIED WITH ANY PORTION OF THE PORTAL INFORMATION, DOCUMENTS OR COMMUNICATIONS ON THE PORTAL, OR WITH ANY OF THESE TERMS AND CONDITIONS OF USE, YOUR SOLE AND EXCLUSIVE REMEDY IS TO CEASE USING THE PORTAL AND THE INFORMATION, DOCUMENTS OR COMMUNICATIONS YOU OBTAINED FROM THE PORTAL.

Icons, Logos and Other Proprietary Material

The trademarks, logos, and service marks (collectively the “Trademarks”) displayed on the portal are registered and common law trademarks of this firm. Nothing contained on the portal should be construed as granting, by implication, or otherwise, any license or right to use any of the Trademarks displayed on the portal without the written permission of this firm. Your use of any of the Trademarks displayed on the portal or displayed on any content on the portal is strictly prohibited. You should assume that everything you see or read on the portal is copyrighted and is a trade secret and may not be used except as provided in these terms and conditions of use or in the text on the portal without the written permission of this firm or its suppliers.

Changes to Terms and Conditions of Use

UE may at any time modify the terms, conditions and notices under which the portal is offered by updating this posting. You are bound to any such modifications and should therefore periodically visit this page to review the then-current terms and conditions to which you are bound.

Confidentiality, Information Protection, and Protection Data

Notwithstanding any existing legal or contractual obligations regarding confidentiality between you and UE, you undertake to treat all knowledge relating to business secrets, which come into your possession, as confidential. You shall assure that any protected data, which comes into your possession through the use of the portal, is not transmitted to any unauthorized person. In partial consideration of the opportunity to access the resources of the portal concerning your account, you agree to maintain the strict confidentiality of access of the portal and its data to you and your authorized Agents and to indemnify and hold harmless UE and its officers, shareholders and employees and their heirs, successors and assigns from and against any and all claims, actions, demands, losses, damages, judgments, costs and expenses, including without limitation, reasonable attorneys’ fees and liabilities of every kind which may arise from your or your employees’ or agents’ use of the portal or because of violation of these terms and conditions of use.

No Unlawful or Prohibited Use

You are prohibited from using the portal to damage, disable, or overburden UE’s servers or network or impair the portal or interfere with any other party’s use of the portal. Hacking, password mining or any other means to gain unauthorized access to the portal, portal accounts, computers or network is prohibited. Posting or transmitting any unlawful, threatening, libelous, defamatory, obscene, scandalous, inflammatory, pornographic, or profane material or any material that could constitute or encourage conduct that would be considered a criminal offense, give rise to a civil liability, or otherwise violate any law is also prohibited. UE will fully cooperate with any law enforcement authorities or court order requesting or directing this firm to disclose the identity of anyone posting any such information and materials. This firm is an equal opportunity employer and values the diversity of its people.

RELEASE AND INDEMNITY. IN AGREEING TO USE, AND BY USING, THE UNTRACHT EARLY PORTAL, YOU ALSO AGREE TO, AND HEREBY DO, RELEASE AND DISCHARGE UNTRACHT EARLY FROM ANY AND ALL CLAIMS OF EVERY NATURE AND DESCRIPTION ARISING OUT OF OR RELATING TO THE POSTING OF INFORMATION ON THE PORTAL, YOUR OR YOUR AGENTS’ USE OF THE PORTAL, AND/OR ANY BREACH OF SECURITY INVOLVING THE PORTAL. YOU HEREBY AGREE TO INDEMNIFY AND DEFEND UNTRACHT EARLY, ITS AGENTS, REPRESENTATIVES AND EMPLOYEES AGAINST ANY CLAIMS, DEMANDS, LAWSUITS AND OTHER PROCEEDINGS MADE ABOUT YOU, MADE BY THOSE IN PRIVITY WITH YOU OR MADE BY THOSE ACTING IN CONCERT WITH YOU, IN ANY WAY, WITH REFERENCE TO YOU OR YOUR INFORMATION OR BY ANY THIRD PARTIES ON YOUR BEHALF (INCLUDING AGENTS) RELATING IN ANY WAY TO THE UNTRACHT EARLY PORTAL.