Extraordinary Estate Tax Opportunity with the Tax Cuts and Jobs Act

You may recall that President Trump promised to repeal the Estate and Gift Tax and their cousin, the Generation Skipping Tax.   However, the enacted version of the Tax Cuts and Jobs Act signed just before Christmas 2017, left these three taxes intact.   The outcome is surprising, given that the Republican Party has often condemned these taxes, and given that the House, Senate, and White House are all on the same side of the party divide.   Yet, complete repeal was not accomplished.   Thus, these taxes remain a huge liability for high net worth individuals and families.

What the Act does accomplish is a doubling of the Estate, Gift, and Generation Skipping Tax Exemption.   Starting on January 1, 2018, the exemption is $11,200,000 for individuals and $22,400,000 for married couples, up from $5,490,000 and $10,980,000 in 2017, respectively. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. The rate remains the same, at 40%.

If you should pass away before 2026, your Estate will benefit from this historic change in the exemption.   Mortality tables show that if you were born after 1947, you have a 50% chance of outliving the 2026 date, when the Estate Tax comes back at full force.   History tells us that if we have a change of parties in power to Democrats, that 2026 date for reducing the exemption might be accelerated.   Thus, it remains critical that high net worth individuals take proactive steps to reduce their exposure to the Estate Tax.

Many tools are at our finger tips to help you reduce your taxable estate through gifting.   The Gift Tax Exemption doubled, allowing an extraordinary opportunity for you to gift substantial appreciating assets without paying a dime of Gift Tax.   Making substantial gifts can be a little frightening: it may bring up issues of control over assets, creating “Trust Babies” who have unrealistic expectations of entitlement, and reducing cash flow.   Careful consideration must be given to these non-tax aspects.   However, these issues can be addressed via strategies involving special types of trusts, such as Dynasty Trusts, Grantor Retained Annuity Trusts, and nontaxable sales to grantor trusts, just to name a few.

You may have noticed that the media has given little mention to the effect of the Tax Cuts and Jobs Act on the income taxation of Estates and Trusts.   Under the new rules, the highest Federal tax rate for a Trust or Estate is 38% on income over $12,500.   Compare this with the highest Federal tax rate for individuals: 35% on $500,000 of taxable income.   Thus, planning distributions to escape the extremely high rate of tax imposed on Trusts and Estates remains critically important.

Since 1916, The Estate Tax Exemption has changed more than 60 times! Despite complete control by Republicans and their repeated aversion to the death tax, the Estate, Gift, and Generation Skipping Tax remains a threat to high net worth families.   Should we have a change in parties over the next few years, what might Democrats do to accelerate that critical 2026 date? One thing you can bet on: Uncertainty is certain!

We have guided our clients through hundreds of Estate Planning transactions resulting in millions of dollars in savings.   We remain ready to point you in the right direction. Please give us a call to see how Wright Ford Young & Co. can help you!

© Copyright 2017. All rights reserved

By Cheryl J. Schaffer, CPA, MST, AEP®

Estate and Trust Partner

January 9, 2018