Dear DLHC clients and friends,

As you all know by now, the Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump on December 22, 2017. You have probably seen or heard countless reports on the impact it will have on the American people and businesses. The problem with what you have heard, it may have been “slanted” by whoever wrote the article, or the TV show may have generalized the impact for all of American taxpayers, not DLHC clients.

This is the third of a series of E-Blasts that we hope are more meaningful than what you may have heard on TV or read in the newspapers or on the internet. We have tried our best to boil down the material and state it in a way that is more applicable and understandable to the DLHC clients and friends.

Estate and Gift Tax Changes

We are very fortunate in that the changes in the estate and gift tax law (as well as the anticipated adverse changes that were not implemented) for the most part are very favorable to our clients. 

Before the TCJA, the first $5.5 million of transferred property was exempt from estate and gift tax. For 2018, the amount would have been adjusted by inflation to $5.6 million. Therefore, under the old rules, a married couple worth less than $11.2 million would not have paid estate or gift tax upon their deaths. Persons over $5.6 million would have been subject to estate and gift tax at a graduated rate that eventually reached 40%. However, under the old rules, if one spouse died under $5.6 million, the unused exclusion could be added to that of the surviving spouse (known as the “portability” feature).

The old rule, enacted in 2012, exempted most taxpayers from the gift and estate tax. However, many of our DLHC clients were worth more than the $5.6 million ($11.2 million as a couple) and thus significant tax planning using trusts, life-time gifts, limited partnerships or other techniques, have been implemented to reduce or manage the estate and gift tax impact to the benefit of the remainder beneficiaries.

The new law essentially doubles the amount that can be excluded from these transfer taxes.  For decedents dying, and gifts made from 2018 through 2025, the TCJA doubles the base estate and gift tax exemption. Thus today, taxpayers have an exclusion amount of $11.2 million (married couples $22.4 million) that can be excluded from the gift and estate tax.

A related transfer tax called the generation skipping tax (GST) was designed to prevent avoiding the transfer tax by skipping one generation and going to the next. Although the TCJA does not specifically mention the GST exemption, since the GST exemption amount is based on the unified credit exclusion, the GST transfers will also benefit from the post-2017 exclusion amount and increase to $5.6 million per taxpayer.

As a side note, the amount taxpayers can give annually to a donee has increased again, now to $15,000 (up from $14,000).

Planning Techniques

For the DLHC clients who are well over the $22.4 million exclusion, we will be looking at making additional gifts to their heirs. The gifts (up to the exclusion amount) will not result in a current gift tax liability, but will allow the future appreciation to be out of our client’s estate. Other techniques under consideration may be a self-settled spendthrift trust or a spousal trust. These trusts are designed to be incomplete for estate and gift tax purposes so they allow the donor some discretionary benefit while still serving to move the assets and appreciation to their heirs.

For the DLHC clients who are well under the $22.4 million exclusion, prior estate planning techniques that we have used for them such as defective trusts, family partnerships, marital trusts, etc. are still in play and do not need to be undone because this bill is set to revert to former amounts after 2025 (if not sooner if there is a change in Congress).

One thing we do know. If your will was written before 2013, it very well needs to be reviewed. Most pre-2013 wills used a different wording and ordering for family or marital trust funding, and with the significant increases in the exclusion amount, the previous ordering may leave very little outright to the surviving spouse and/or not provide a step-up in tax basis at the second to die’s death. This could result in a significant amount of income tax paid by the ultimate heirs. So these wills need to be revisited.

Please call us at (205) 871-9973 so that we may answer any specific question you may have or review your will and estate plan.