Financial and Estate Planning Opportunities under the Tax Cuts and Jobs Act of 2017 (the “Act”)

One of the more significant aspects of the Act is its failure to repeal the federal estate tax, a long-standing goal of the Republican Party. The Act did, however, double the exemption, and without repealing the step-up in basis. Specifically, starting in 2018, the exemption for estate, gift and the generation-skipping transfer tax, which was $5.6 million per person last year, is now $11.2 million per person, or $22.4 million per couple (if US citizens). This presents those of our clients, who already gifted up to the previous lifetime limitation, with an opportunity to make additional gifts commencing January 2018. In other words, wealthy people now have the proverbial “second bite at the apple”. They can make significant gifts and thereby reduce their taxable estates, without paying any gift tax! Apexium recommends that people considering making additional gifts do so expeditiously, as the window might shut just as rapidly as it opened.

Under the Act, this increased estate tax exemption will expire after 2025 and revert back to the law in effect for 2017, with inflation adjustments. Eight years is a long time, but should the Democrats regain control of the federal government and/or if the country is hungry for increased tax revenue, there is a possibility that higher exemptions will sunset as legislated, if not be rescinded prior.

Estate and Wealth Transfer Opportunities

Record-high exemption amounts, even if temporary, create a rare opportunity to employ strategies that allow individuals to lock in their current exemptions and possibly avoid future transfer (the federal transfer taxes are the estate, gift and generations-skipping transfer tax (“GSTT”) taxes. Although some of the more sophisticated techniques, such as discounted gifts, intra-family loans, GRATs, QPRTs, split-dollar and estate freezes still have merit, the simpler technique of a direct gift of cash or a high basis capital asset (such as stocks or real estate) will suffice for most folks.

Lifetime Gifts

By using some or the entire increased exemption amount to make additional tax-free lifetime gifts, individuals can transfer significant assets to heirs and shelter those transfers, and any appreciation thereon, from taxation in their estate. Unlike a bequest or when an asset otherwise transfers upon death, gifts are not eligible to a step-up in tax basis. This can create an income tax liability for the recipient of the gift, be it a trust or an individual, should they choose to sell the gifted asset. Consequently, it is important to weigh the potential estate tax savings against the potential income tax costs to the recipient. It is equally as important to consider 1) what type of asset to gift and, if not cash, what the basis is in such asset; and 2)should the recipient of the gift be a trust or an individual.

GSTT Exempt and/or Dynasty Trusts

Irrevocable trusts that are GSTT-exempt permit substantial amounts of wealth to grow and compound free of ALL federal transfer taxes, and thus provide wealth for an individual’s grandchildren and future generations. The longevity of such a trust is dictated by state law and varies from state to state, but it’s becoming common for states to allow these trusts to last for hundreds of years—or even in perpetuity. For example, New Jersey rescinded its Rule against Perpetuities, so such a trust in NJ can last forever, and would therefore be a Dynasty trust. Conversely, New York still has a Rule against Perpetuities, so such a trust in NY cannot last forever. It can still be exempt from the GST tax, but would not be a Dynasty trust. When creating an irrevocable GSTT-exempt trust in a state with a Rule against Perpetuities, Apexium strongly suggests that the trust include a provision authorizing the trustee to “move” the trust, at his or her discretion, to a state where it can qualifies as a Dynasty trust.

If an individual hasn’t yet used any of his or her gift and estate tax exemption, for example, in 2018, they could transfer over $11 million to a properly structured Dynasty trust. There’s no gift tax on the transaction because it’s within that individual’s unused exemption amount. And the funds, together with all future appreciation, would be removed from their taxable estate. Moreover, by allocating the GSTT exemption to trust contributions, individuals can help make sure that any future distributions or other transfers of trust assets to their grandchildren or subsequent generations won’t be subject to GSTT. This is true even if the value of the assets grows well beyond the exemption amount. This is often the case when the initial gift is leveraged in whole or in part with life insurance. The $11 million dollar gift might, for example, purchase $50 million of death benefit –all of which would be forever free of any gift, estate or GST tax!

Gifts of Low Basis Assets

If a low basis asset such as a residence, or a depreciable asset like rental real estate, for example, is expected to be sold shortly after the death of the grantor, there could now be situations where an individual would want to keep the asset as part of their estate. The tax basis of an asset included in the estate of the grantor generally receives a step-up to the asset’s fair market value at death. Conversely, the tax basis of an asset gifted during life is generally the carryover original purchase price.

Other Considerations

The Act includes several provisions that may impact estate and business planning other than wealth transfer opportunities. Some of which these include:

  • Wills and Trusts
    In some cases people have language in their wills and revocable trusts directing the executor or trustee to fund a trust, called a bypass or credit shelter trust, using any remaining estate exemption at death before distributing estate assets to beneficiaries, including a spouse. With the increased estate exemption, the potential size of the bypass or credit shelter trust could unintentionally disinherit certain beneficiaries. Let your Apexium relationship manager know if you would like our estate planning team to review your will and/or trust.
  • Business Planning Opportunities
    Previously, buy-sell arrangements where there were numerous owners generally avoided the stock redemption approach, in part, because of the corporate AMT. Instead, business owners often turned to cross-purchase agreements, whereby each owner owned a life insurance policy on the life of each other owner. With the elimination of the corporate AMT, it may be worth re-examining the use of redemption arrangements.
    Furthermore, under the Act with C corporations generally paying a lower income tax than their owners would pay, individually, on distributed income, it may now be prudent for C corporations to pay for and own (at least initially) life insurance, rather than have such insurance financed by the owners with after-tax dollars.


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Apexium is not a law firm, does not draft legal documents and does not render legal advice.