What Tax Reform Means For Your Estate Plan

By George L. Metcalfe, Jr.

On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Act” into law, which effectively makes significant changes to the current Internal Revenue Code. The new law provides a massive opportunity for individuals and families with large estates who are affected and will benefit from the new law.

The most notable change to the tax laws affecting wealth transfer is the doubling of the basic exclusion amount from estate tax from $5,000,000 to $10,000,000 per U.S. person. After application of the formula in the Code, the basic exclusion amount from estate tax in 2018 will be $11,200,000 per decedent. The basic exclusion amount for the generation skipping transfer tax is also $11,200,000 in 2018. U.S. persons with a taxable estate higher than $11,200,000 will be subject to the 40% estate tax. For married U.S. citizens with a substantial estate, a decedent’s estate can elect for portability and apply the surviving spouse’s basic exclusion amount in order to transfer $22,400,000 to the next generation without paying any estate or generation skipping transfer tax.

It is important to note that the increase in the basic exclusion amount to $10,000,000 (before the formula application) will expire on January 1, 2026, and will return to the $5,000,000 amount applied before the new legislation unless Congress renews or extends the current basic exclusion amount. Given the unpredictability and volatility of politics today, there is no telling whether Congress will extend the basic exclusion amount beyond January 1, 2026. There is also the possibility that a newly elected Congress could make substantial changes or even repeal portions of the new legislation.

With respect to the gift tax, the annual exclusion amount from gift tax from $14,000 per donee in 2017 has been increased to $15,000 per donee in 2018. The annual exclusion amount from gift tax will continue to be adjusted for inflation each year as provided by the IRS and Treasury. Likewise, in 2018, an individual donor may gift up to $15,000 to a donee without paying any gift tax or using part of their lifetime basic exclusion amount. If the donor and the donor’s spouse agree to a joint gift, then the annual exclusion is doubled to $30,000 per donee.

An aspect of wealth transfer planning that went un-addressed in the new legislation is the treatment of utilizing valuation discounts for Family Limited Partnerships (FLPs). Early in 2017, the U.S. Treasury Department had attempted to curb the practice of utilizing valuation discounts for lack of marketability and control by issuing proposed regulations for section 2704, which would have severely limited an estate’s opportunity to reduce the overall estate tax liability when dealing with assets such as FLPs, and other closely-held family business entities. In October of 2017, the Treasury and the IRS withdrew such proposed regulations. As the legislation currently stands, such valuation discounts should remain an important technique going forward in reducing an estate’s tax liability unless such proposed regulations are reconsidered by the Treasury.

With such considerations in mind, families with large estates should take advantage of the current legislation by revisiting and adjusting their estate plans to consider the ramifications of the larger basic exclusion amount of $11,200,000 from the previous $5,490,000 in 2017. For families with large estates that have not made any plans for succession, the new legislation provides an opportunity to engage in succession planning. Accordingly, while the new legislation provides a significant opportunity for families with larger estates, such families should continue to employ the techniques of annual gifts, value shifting, discounting for lack of control and marketability, life insurance, and estate freezes which were previously utilized in their estate plans to transfer wealth to the next generation in a tax efficient manner.