John S. Stevenson, III, Esq.
© Musgrove Law Firm, P.C. 2018

In light of the passage by Congress of the Tax Cuts and Jobs Act of 2017 (the “Act“), we highly encourage our clients to review their current estate plan (or, in the event they don’t have one, to get one in place) in order to take advantage of favorable tax provisions created under the Act.

The Act doubles each taxpayer’s unified credit or exclusion from federal estate and gift tax through 2025, allowing a taxpayer to gift up to $11.2 million (or $22.4 million per married couple), indexed for inflation, during life and at death without incurring federal gift or estate tax. Before the Act was passed, taxpayers had a lifetime exclusion amount of $5.6 million (and $11.2 million per married couple), indexed for inflation. Further, the annual gift tax exclusion for 2018 is now $15,000 per recipient, its highest point ever.

Similar to the estate and gift tax exclusion, the Act has increased the generation-skipping transfer tax (“GSTT“) exemption. For 2018, an individual may transfer approximately $11.2 million (approximately $22.4 million for a married couple) without incurring a GSTT. This GSTT exclusion is separate from, and in addition to, the estate and gift tax exclusion.

Beginning in 2018, high net worth taxpayers would be well advised to institute a gifting program to individuals or charities (whether outright or through a trust or family limited partnership) in order to reduce their taxable estate and take advantage of beneficial federal income tax deductions. In order to get the most out of the favorable tax provisions of the Act, taxpayers should consider gifting assets to long-term trusts such as dynasty trusts for grandchildren and future generations (i.e., skip persons for purposes of GSTT) before the doubled exclusion and GSTT exemption amounts expire on January 1, 2026 and return to their pre-Act values.

Further, we recommend that clients with tax planning trusts review their estate plans to determine whether such plans still serve their intended purposes. For example, if a taxpayer’s current plan provides for the automatic creation of a Bypass Trust (aka a “Credit Shelter Trust“) on the death of the first spouse, the assets allocated to such trust would not receive a step up in tax basis for federal income tax purposes (currently still in existence under the Act) on the death of the surviving spouse. In the event that the increased gift and estate tax exclusion obviates the need for a Bypass Trust, the taxpayer could restructure their plan to ensure the share of the estate of the first spouse to die is instead transferred to the surviving spouse (either outright or in trust), thus ensuring it receives a step up in tax basis on the death of the surviving spouse. Such a basis adjustment could potentially eliminate some, if not all, of the income tax generated by a subsequent sale of such assets.

For clients whose estates are not affected by the recent changes to the federal estate and gift tax exclusion and the GSTT exemption, we still highly recommend getting an estate plan in place in order to control the disposition of their estates and take care of loved ones upon their deaths. Please contact us for any of your estate planning needs.