The Tax Cut and Jobs Act (the “Act”) was signed into law on December 20, 2017, with an effective date of January 1, 2018. Among other things, the Act favorably amended the federal estate, gift, and generation skipping transfer tax laws. The amendments of the Act will impact client estate plans in a variety of ways.

The Act doubled the exemption amounts for taxpayers for estate, gift, and generation skipping transfer taxes. The exemption amounts are now $11,200,000 per person and $22,400,000 per married couple. The exemption amounts will increase each year based on inflation. The increased exemption amounts under the Act, however, will only exist through December 31, 2025. Unless the law is amended, the increased exemption amounts will “sunset” on January 1, 2026 to their pre-2018 levels (increased for inflation). The Act did not amend the tax rate for estate, gift, and generation skipping transfer taxes, which remains at 40%.

Clients may be concerned whether their estate plans are “current” because of the Act or if changes are necessary. Every estate plan – regardless of the tax laws – should be reviewed periodically to ensure that the plan carries out the client’s objectives while at the same time addressing any necessary tax planning. With the passage of the Act, clients should consider the following:

Some clients will be able to simplify their estate plans given the increased estate tax exemption amount.

Clients who are still impacted by the estate tax will want to consider additional estate planning techniques that avoid or mitigate estate tax exposure. For example, Grantor Retained Annuity Trusts are attractive in a low interest rate environment as are transactions involving Intentionally Defective Grantor Trusts.

Certain clients may want to consider unwinding trusts or taking other steps to own highly appreciated assets so there is an income tax basis step up at death (clients will need to weigh the creditor protection offered by a trust against the tax consequences of no basis step up).

Clients with Irrevocable Life Insurance Trusts may want to unwind these trusts or make additional gifts to the trust to fund the life insurance policies.

Another consideration for clients is that the Act may be amended or revoked. The Act likely would be amended or repealed if President Trump is not reelected and the Democratic Party gains control of the House and the Senate. Some clients may want to consider taking advantage of the increased exemption amounts by making current gifts to family members or trusts or implementing a gifting strategy for so long as the increased exemption amounts remain available.

Every estate plan and estate planning client are unique, so the Act will impact each client differently.  Some clients, for example, will want to retain income producing assets while gifting non-income producing assets. Other clients may want to unwind trusts while other clients may want to continue trusts for tax planning or asset protection reasons.

We recommend a periodic review of any estate plan because the law and the client’s circumstances and planning goals change.