Monday, January 1, 2018

Tax Act Offers Estate Planning Opportunities

Chris Staples
Author position
Trust & Estate Planner - Hilliard Lyons Trust Company

When President Trump signed the sweeping tax overhaul bill into law on December 22, the corporate tax cut and the changes to individual income tax deductions grabbed most of the headlines. While these and other income tax provisions will indeed have a marked impact on paychecks and corporate earnings, the changes to the estate and gift tax got much less attention –except for the fact that the tax wasn’t repealed.

The bottom line? While death and taxes are still inevitable, taxes on estates of significant size became less so.

Under the new law:

  • The federal estate, gift, and generation-skipping tax exemption doubles and will continue to be adjusted annually for inflation. Until the IRS issues the official inflationary adjustments, we won’t know the exact amount of the exemption. But most analysts believe it will be approximately $11.2 million per person, which means couples can transfer up to $22.4 million free of estate tax.
  • The federal estate and gift tax rate for amounts above the exemption remains at 40%.
  • Assets owned at death still receive a step-up in cost basis to their date-of-death value. That is, an asset purchased for $10 but valued at $100 at the time of the testator’s death will have a cost basis of $100 – so future taxable gains in value will be measured off of that higher base, reducing taxes.

The lack of attention the estate tax provisions received is perhaps understandable considering that only about one of every 500 people who die were subject to the tax under the old law. Logically, then, the changes in the new tax law should mean even fewer individuals will need to worry about the tax when evaluating their estate plan. If that were only true; read on.

Sunset causing heartburn

Unfortunately, uncertainty remains due to a sunset provision in the law, inserted in the law to create a tax-neutral tax bill under Senate budgetary rules. Under it, all individual changes in the tax overhaul, including the estate tax provisions, will revert to the pre-2018 law on January 1, 2026 – eight years from now. And hardly anyone reading this can know for sure whether they will die on or before December 31, 2026.

Presumably, after “sunset,” the estate tax exemption will revert to approximately $6.2 million. Of course, we will have two presidential elections between now and then –and we’ve seen that elections have consequences. A new administration, along with a willing Congress, could reduce the exemption amount before the sunset.

This uncertainty alone is reason enough for you to continue to review and update your estate plan regularly. The reality is that most people craft their estate plans with a significant focus on non-tax issues such as protecting family wealth and ensuring that wealth is transferred to future generations in a responsible manner as they intend. Certainly, the available federal estate tax exemption could affect some elements of your plan, but your goals and wishes are still what inform it. Now is not the time to be lulled into a sense of complacency because estate taxes seem like a distant worry. Non-tax issues will exist regardless of tax law.

New planning opportunities

Of course, the increased exemption amount does create some planning opportunities. Remember, assets at death receive a step-up in cost basis. This can significantly reduce the income tax burden on surviving spouses and other heirs. With exemptions in excess of $11 million, a couple may be able to pass assets of $22 million through proper planning to get a full cost-basis step-up. The income tax savings could be substantial for heirs, which is why income tax planning, as part of estate planning, has become more critical.

The increased exemption amount also gives you an opportunity to engage in additional giving and planning strategies if you have previously used some or all of your lifetime exemption. This is especially attractive if you hold potentially high-growth assets and face the prospect of estate taxes regardless of the size of the exemption. The increased exemption creates a unique opportunity to engage in giving and transfer strategies to shore up or enhance previous planning.

Even without the tax overhaul, the annual gift tax exclusion increased from $14,000 to $15,000 beginning January 1, 2018, adding another tool to help with planning.

Other changes for 2018 and beyond

The tax overhaul may adversely affect charitable giving due to the changes in the standard deduction (increased to $12,000 for singles and $24,000 for married couples filing jointly). With this increase, many households will rely on the standard deduction rather than itemizing. This could result in donors seeing no income tax benefit for some charitable gifts.

Most people give out of a desire to help a particular charity, so this loss of a tax benefit will not stop most donors from giving to their favorite charities. (That said, many charities are very wary of how the new tax law will affect their fundraising efforts.) But this change should encourage you to consider whether you are maximizing the tax benefits of your giving. For instance, advanced charitable trust strategies, making qualified charitable distributions from IRA accounts, and using donor-advised funds or private charitable trusts may offer significant tax advantages for individuals who haven’t previously considered these types of charitable strategies.

Some advice never changes much …

The key today with estate and tax planning, as it has been for the last several years, is ensuring that your plans are current and flexible enough to work in a variety of tax landscapes. If you and your family have significant assets that you want to transition while maximizing tax benefits, you should regularly review your plans with your estate counsel or tax advisor.

Hilliard Lyons Trust Company, LLC does not provide tax or legal advice. Clients should consult with their own attorneys and accountants regarding their own individual situation.