Will the New Tax Act Affect You? Part Three

In my last post, I discussed some key changes of the Tax Cuts and Jobs Act that will be affecting business entities. In this post, I will discuss how the Act will impact an individual’s decisions on estate planning.

Part Three: Estate Planning

Unlike some of the tax law changes that affect corporations (as discussed in Part Two) which are permanent, the changes to estate tax, gift tax, and generation-skipping transfer tax are effective in tax year 2018 and set to expire after 2025. 

Beginning 2018, the Tax Cuts and Jobs Act increased the exemption amount (the amount that an individual can gift or own at death without being subject to gift or estate tax) from $5,490,000 (for 2017) to $11,180,000.  The exemption amount is $22,360,000 for a married couple.  The generation-skipping transfer tax exemption has also been increased to the same amounts for individuals and married couples and also set to expire after 2025.

While the change may not affect estate planning considerations for individuals or married couples with estates below the pre-Tax Act exemption amounts, those who are at or above the pre-Act exemption should re-evaluate their estate plan accordingly.

One of the starting points is to consider both the income tax consequences and the estate tax consequences in the assessment of your estate plan.  For example, an individual who currently holds an asset with a low adjusted basis and that asset has significantly appreciated in value (and is expected to continue to appreciate throughout the individual’s lifetime) may want to hold the asset until death in order to obtain a step-up in the basis of the asset.  At death, the basis of the asset will be treated as equal to its fair market value, thereby resulting in income tax savings on the gains of the asset.  While the value of the asset in includible in the gross estate of the decedent, the increase in the estate tax exemption may eliminate the concern of triggering the estate tax liability for those individuals and married couples below the newly-increased exemption amounts.

Individuals and married couples with estates that are above the increased exemption amounts should consider making gifts to irrevocable trusts up to the exemption.  By doing so, the value of those assets transferred over to the irrevocable trusts will be removed from the decedent’s gross estate and will not be included in the calculation of the estate tax liability.  Furthermore, the irrevocable trusts may be drafted in such a way as to allow the transferred assets to grow tax-free while the trusts are administered for the benefit of loved ones. 

There are different estate plan considerations for a U.S. citizen who wishes to provide for a non-U.S. citizen spouse.  While one U.S. citizen spouse can gift and bequest to another U.S. citizen spouse an unlimited amount of assets free of tax, a U.S. citizen spouse may not do the same with a non-U.S. citizen spouse (even if that spouse is a U.S. resident or a U.S. green card holder).  Rather, an annual exclusion amount ($149,000 for 2017) is allowed for transfers from a U.S. citizen spouse to a non-citizen spouse.  As a result of the temporary increase in the exemption amount, however, the U.S. citizen spouse may now have more flexibility to gift assets to the non-citizen. 

For example, the U.S. citizen can make a gift (up to, or even more than, the annual exclusion amount) to an irrevocable life insurance trust for the benefit of the non-citizen spouse.  The trust then purchases a life insurance policy on the life of the U.S. citizen spouse.  The death proceeds do not have to qualify for the marital deduction because the death benefits will generally be excluded from the insured’s estate.  Alternatively, the life insurance policy could be owned by the noncitizen spouse.  Again, the proceeds do not need to qualify for the marital deduction because the death benefit generally will be excluded from the U.S. citizen’s estate.

Whether you currently have an existing estate plan, or you are considering whether to create one, please visit the five common misconceptions you should avoid and talk to an estate planning attorney to determine the best strategy that will most benefit you and your love ones.