New 2018 Federal Estate and Gift Tax Rules
The Tax Cuts and Jobs Act (the “Act”) was passed by Congress and signed into law by President Trump on December 22, 2107. Among its many changes to the Federal tax code, the Act will double the Federal estate, gift and generation-skipping transfer (“GST”) tax exemption amounts from $5 million to $10 million per individual, with additional inflation adjustments as under prior law.
The increased, inflation-adjusted exemption amounts – approximately $11.2 million for an individual, or a combined $22.4 million for a married couple – are effective for estates of decedents dying, and gifts made, after December 31, 2017 (with potential future inflation adjustments for 2019 and subsequent tax years), but are scheduled to expire on December 31, 2025, after which the relevant Federal estate, gift and GST tax exemption amounts would revert to the prior $5 million amounts, plus the relevant inflation adjustments.
Estate planning in 2018 will be focused on reviewing Wills and other testamentary documents in light of the increased Federal exemption amounts, taking into account:
The continued availability of a “step-up” in income tax basis at death to determine which assets should be included in any testamentary trusts or other testamentary dispositions and assets that should be directly inherited by beneficiaries so that a proper analysis of income tax and estate tax consequences can be appropriately made;
The possibility that current plans may include one or more “formula dispositions” of the type described below that may require immediate attention because they are no longer appropriate or otherwise have unintended consequences;
Any relevant state level estate taxes, such as the repeal, in 2018, of the New Jersey Estate Tax;
The scheduled January 1, 2026 reduction in the new Federal exemption amounts (and the
possibility of sooner changes as part of future tax legislation); and
Any other changed family or financial circumstances.
There should be a renewed interest, especially by those individuals who have already exhausted their prior exemption amounts, in making lifetime gifts to take advantage of the Act’s increased exemption amounts while they are available.
Increased attention should be made to certain state level income tax planning, including whether any state income tax savings can be achieved through the use of certain “non-grantor trust” structures.
Some testamentary plans may include so-called “formula dispositions” in an amount equal to the Federal or applicable state estate tax exemption amount, or other tax influenced dispositions, that should be reviewed to determine whether they continue to be appropriate.
For example, in the past it was not uncommon for a decedent’s Will to include a “credit shelter disposition” to a “credit shelter trust” or other “disclaimer-type” trust that included children as beneficiaries, with the balance of the estate passing to or in trust for a surviving spouse. Credit shelter dispositions were often defined by a formula expressed in terms of the maximum amount that could pass at death from the decedent’s estate free of Federal estate tax. With a significantly increased Federal estate tax exemption amount, such a disposition could result in unanticipated state level estate tax or, if a spouse is not a named beneficiary of the credit shelter trust, in significantly reduced assets being available to a surviving spouse. Formula dispositions tied to a decedent’s unused estate, GST or other exemption potentially could have similar results.
Accordingly, individuals should consult with their advisors to determine whether their estate
planning documents contain any dispositions determined by a formula referring to an “exemption equivalent amount,” “applicable credit amount,” or “unused GST exemption,” or other dispositions that could have unintended consequences in light of tax or other changes that have taken place since those documents were first executed.
State Transfer Tax Developments
The New Jersey estate tax is scheduled to be repealed effective January 1, 2018. New Jersey will, however, retain its separate inheritance tax, which does not generally apply to transfers to a spouse, child or grandchild. The New Jersey inheritance tax is based on the relationship between the decedent and the beneficiary receiving assets from the decedent. Under the inheritance tax, transfers to siblings are generally taxed at a rate beginning at 11% (top rate is 16%) and transfers to others are taxed at a rate of 15% or 16% (New Jersey inheritance tax is also deductible for Federal estate tax purposes, to the extent a Federal estate tax would otherwise be payable).
(Taken from Davis, Polk & Wardell, LLP, Client Memorandum to Morgan Stanley clients)