Impact of New Tax Laws on Estate Planning

by Polsinelli


The Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law by the President on December 22, 2017, and represents one of the most significant rewritings of the federal tax code since 1986. Among its many changes to the tax laws, the Act doubles the estate, gift and generation-skipping transfer “GST” tax exemptions, which could affect estate planning decisions and tax planning strategies.

The increases to the estate, gift and GST tax exemptions took effect on January 1, 2018, but those changes are temporary and are currently set to expire at the end of 2025.

The key changes made to the transfer tax rules under the Act are summarized below:

Transfer Tax Exemptions: The Act increases the estate, lifetime gift and GST tax exemptions from a base of $5 million to a new base of $10 million (indexed for inflation). After taking into account inflation, in 2018, the exemption will be $11,180,000 (or a combined $22,360,000 for a married couple). These increases will only last until the end of 2025, at which time the exemptions will revert to the amounts under the current law with a base of $5 million (indexed for inflation).

Transfer Tax Rates: The top marginal tax rate for the federal estate, gift and GST tax are not impacted by the Act and will remain at 40 percent.

Portability: The portability rules for married couples will also remain unchanged under the Act. The portability rules allow a surviving spouse or his or her estate to make use of any unused estate and gift tax exemption remaining from the estate of the first spouse to die.

Annual Gift Tax Exclusion: While not part of the Act, the annual gift tax exclusion increased from $14,000 in 2017 to $15,000 in 2018 (or $30,000 for married couples). The annual exclusion is the maximum amount that a donor can give to another individual without incurring gift tax consequences. In future years the annual exclusion amount may increase after adjustment for inflation.

New 20 Percent Pass through Deduction on Qualified Business Income

The Act creates a new deduction of up to 20 percent of Qualified Business Income (“QBI”) for owners of pass-through entities. This new deduction will be available for business owners to take on their 2018 income tax returns.

The requirements for utilizing this deduction are summarized below:

Available only to Pass-Through Entities: This new deduction is available exclusively to owners of pass-through entities such as partners of partnerships, members of limited liability companies, shareholders in S corporations, and sole proprietors.

Qualified Business Income: QBI is the net income from the business throughout the year as determined by deducting all of your business deductions from your business income. QBI does not include compensation received from the business. If a taxpayer is an owner of multiple pass-through entities, QBI is calculated separately for each entity.

Limitations on the Deduction: In order to claim the deduction, you must have taxable income. A taxpayer is allowed the entire 20 percent deduction if the taxpayer’s income is below $157,500 individually ($315,000 if married filing jointly). If the taxpayer’s income exceeds the stated limits, the deduction is phased out. For taxpayers who are service business owners (health, law, accounting, etc.), the deduction is phased out completely when the taxpayer’s income exceeds $207,500 for an individual ($415,000 if married filing jointly). For non-service providing taxpayers, whose income is greater than $207,500 for an individual ($415,000 if married filing jointly), the deduction is limited to the lower of A) the 20 percent deduction; or B) the greater of (1) 50 percent of their share of W-2 employee wages paid by the business; or (2) 25 percent of their share of W-2 wages, plus 2.5 percent of their share of the acquisition cost of depreciable business property. There are additional phase out rules for income between $157,500 and $207,500 for an individual ($315,000-$415,000 if married filing jointly).

Qualified Tuition Programs (529 Plans)

Historically, 529 Plans could only be used to pay expenses at colleges and universities. Under the Act, 529 Plans may now be used to also cover expenses at public, private, or religious elementary and secondary schools, however distributions to the expanded educational institutions is limited to 10,000 per year per beneficiary.

Kiddie Tax

Before the passage of the Act, a child’s unearned income was taxed at the parents’ income tax brackets and rates. Starting in 2018, the Act will tax the unearned income in excess of $2,100 at the rates applicable to trusts and estates, which are often higher than the parent’s rates.

New Planning Opportunities under the Act

The increase in the exemption amount from $5 million to $10 million (adjusted for inflation) creates an immediate need to review previously drafted estate planning documents. The higher exemption amount has also created several new planning opportunities for both those who are subject to Federal Estate Tax (under the new Act, or at the end of 2025 when the increased exemption expires), and for those who are not subject to Federal Estate Tax.

A few concerns regarding previously drafted documents, as well as several of the new planning opportunities are summarized below:

Formula Clauses: Formula clauses currently included in planning documents should be carefully reviewed. Many formula clauses leave the amount of the exemption in trust for the children, and the remainder to the surviving spouse. With the increased exemption amount, a $11 million estate would be pass entirely to the children with nothing remaining for the surviving spouse. The same formula clause in December 2017, under the prior exemption amount, would have divided the estate and left $5,490,000 to the children and $5,510,000 to the surviving spouse. A formula clause can cause unintended results, such as disinheriting a surviving spouse, and should be carefully reviewed.

Opportunities for Individuals who are subject to the Federal Estate Tax: The increase in the exemption amount provides individuals with an opportunity to make large gifts to use the increased exemption prior to its sunset at the end of 2025, or an act of Congress repealing the Act. While the IRS has not yet released guidance regarding this issue, many commentators believe that large gifts made while an increased exemption is in effect will not be added back into the donor’s estate. Making a gift during this time period could significantly reduce the future tax burden on the estate in the event the exemption returns to $5 million (adjusted for inflation) at the end of 2025 as is the case under the Act.

Opportunities for Individuals who are NOT subject to the Federal Estate Tax:   Individuals who are not subject to Federal Estate Tax should also review their estate plans.  There are income tax planning opportunities, such as planning to achieve an additional step-up in basis at the death of a spouse/beneficiary, which an individual may choose to focus on in light of the increased exemption amounts.  Upon an individual’s death, their property receives a basis adjustment to the date of death value of the property, often times resulting in significant income tax savings.  In past years when the estate tax exemption was lower, the plan was often to exclude property from a decedent’s estate to reduce the estate tax liability.   With an $11 million exemption, many individuals can focus on planning for income tax savings instead of estate tax savings.  

One planning technique is to simplify the estate plans of those who are not subject to the estate tax by ensuring their assets will be includable in their spouse/beneficiary’s estate, thus allowing for an additional step up in basis upon the death of the spouse/beneficiary. The combination of the increased estate tax exemption and the ability to receive a step up in basis necessitates the need to review traditional estate planning techniques to determine if including property in an individual’s estate results in a greater income tax benefit than excluding it may have had for estate tax purposes under the prior (lower) exemption amounts.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Polsinelli | Attorney Advertising

Written by:


Polsinelli on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.