Impact of the Tax Law on Estate Planning

by Kramer Levin Naftalis & Frankel LLP
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Kramer Levin Naftalis & Frankel LLP

President Trump signed sweeping tax legislation into law on Dec. 22, 2017, resulting in several significant changes to the wealth transfer tax system, effective as of Jan. 1, 2018.

This Alert highlights the provisions of the new tax law that directly relate to estate planning and, more importantly, focuses on how the new law may impact you and your estate plan.

Estate Tax

  • The estate tax exemption amount is doubled. In 2018, each individual has an exemption from the federal estate tax of approximately $11,200,000, which will be adjusted annually for inflation. This increased exemption amount is effective Jan. 1, 2018, through Dec. 31, 2025 (at which time the exemption is slated to return to the 2017 amount).
  • The top federal estate tax rate remains at 40% on assets in excess of the exemption.
  • A deceased spouse’s unused exemption at death remains portable to his or her surviving spouse.
  • Stepped-up (-down) income tax basis under Section 1014 remains.
  • There is no repeal of the estate tax. As noted above, on Jan. 1, 2026, the federal estate tax exemption amount is slated to decrease to the 2017 level, adjusted for inflation.

Gift Tax

  • The gift tax exemption amount is doubled. In 2018, each individual has an exemption from the federal gift tax of approximately $11,200,000, which will be adjusted annually for inflation.
  • The top federal gift tax rate remains at 40% for lifetime taxable transfers made in excess of the exemption.
  • The annual exclusion amount has increased to $15,000 (and will continue to be adjusted annually for inflation).
  • There is no repeal of the gift tax. On Jan. 1, 2026, the federal gift tax exemption amount is slated to decrease to the 2017 level, adjusted for inflation.

Generation-Skipping Transfer (“GST”) Tax

  • The GST tax exemption amount is doubled. In 2018, each individual has an exemption from the federal GST tax of approximately $11,200,000, which will be adjusted annually for inflation.
  • The top federal GST tax rate remains at 40% on generation-skipping transfers of assets in excess of the exemption.
  • There is no repeal of the GST tax. On Jan. 1, 2026, the federal GST tax exemption amount is slated to decrease to the 2017 level, adjusted for inflation.

How The New Tax Law May Affect Your Estate Planning:

Unanticipated Impact on Existing Documents

The increased exemptions may result in unintended testamentary dispositions, therefore requiring important immediate changes to your existing documents.  Your documents may create trusts that are to be funded according to formula clauses tied to the exemption amount in effect on your date of death.  If your death occurs before 2026, the new law may cause these trusts to be funded with significantly larger amounts than you were anticipating when the documents were signed.  Therefore, we recommend that, at the very least, you review the terms of your existing wills or revocable trusts and call us to discuss your existing estate plan so that we may assist you in determining whether revisions are necessary.

Temporary Planning Opportunity Using the Increased Exemptions 

As mentioned above, the new record high exemption amounts are temporary and are slated to decrease significantly in 2026.  Therefore, you have a limited window of time in which to take advantage of this rare opportunity to transfer substantial amounts of wealth to future generations without incurring any transfer tax liability.

If, by Dec. 31, 2017, you already used your entire federal exemptions, you now have approximately an additional $5,600,000 of exemption to use (or, as a married couple, approximately an additional $11,200,000).  As an added benefit, by engaging in lifetime gifting, you will also decrease your taxable estate for state estate tax purposes as many states, including New York, will continue to have an estate tax exemption that is significantly less than the new federal exemption.

Income Tax Planning

Given the large exemption amounts now available and the fact that income tax basis rules are not changing, there may be more opportunity to plan for the reduction or elimination of income taxes on appreciated assets upon death. 

State Estate Taxes

The larger disparity created by the new tax law between many state estate tax exemption amounts and the new federal exemption amount has generated an important reason to engage in estate tax planning, as this disparity may result in a large state estate tax upon your death (depending upon the formula clause in your documents).

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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.

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