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What the IRS 2017 Tax Act Means for Estate Planning & Wealth Transfer

David L. Case, ,  |  October 13, 2018

The Revenue Reconciliation Act of 20171 (the “2017 Tax Act ”) is revolutionary legislation that drastically changes many areas of federal tax law, and for the most part brings tax reduction. And yes, as is often the case with new tax legislation, there are matters that will need further refinement over time as interpretation and application issues appear and are ironed out through Treasury regulations.

From the perspective of estate planning attorneys and their clients, the doubling of the estate and gift tax exemption amount (or applicable exclusion amount), and all the planning implications thereof, is a very significant development, even though, because of budgetary limitations, it applies only for gifts made and estates of decedents dying after December 31, 2017, and before January 1, 2026.

  • The base exemption amount for such period is increased from $5 million to $10 million.2
  • With the inflation adjustment, the exemption for 2018 is projected to be $11,180,000 and $22,360,000 per married couple.3

Generation-Skipping Transfer (GST) Tax

This change, in turn, also automatically increases the generation-skipping transfer tax (GST tax) exemption amount since the GST tax exemption relates back to that for estate tax.4

Although the 2017 Tax Act continues annual adjustments for inflation to the applicable exclusion amount and GST exemption amount, a different consumer price index is now used for the Internal Revenue Code (IRC), which many believe will result in smaller increases over time and thus be less beneficial than the prior index. This change will continue after 2025 even though the base exclusion amount increase will sunset in 2026.5

Because of the scheduled December 31, 2025, sunset of this increase in exemption for all three wealth transfer taxes (gift tax, estate tax and GST tax), if the law does not change, this presents a “use it or lose it” situation that, for many people, may pose a need for action in the short term. Though yet to be determined, this may be an issue only if aggregate taxable transfers exceed the exemption amount after reduction at the time of sunset, or the effective date of new legislation that could limit or repeal these changes sooner than 2025.

The need for additional planning now is especially true for clients who have used up most or all of their gift and estate tax exemptions and still have need for more future wealth transfer tax reduction. And where such clients were previously reticent to do more planning because of the additional gift tax or GST tax that would be payable, they now may have a means to achieve the additional needed planning without current payment of tax.

Clawback Under the 2017 Tax Law

As with some changes in the wealth transfer tax law during the last administration, some planners have questioned whether there might be a “clawback” of the additional gift tax exemption on death after 2025 because of the mechanics of the computation of estate tax payable on the IRS Form 706 Estate Tax Return. It goes without saying that such a result would be patently unfair, would undermine the intent of this legislation, and might be unconstitutional. However, most commentators and practitioners do not believe “clawback” would occur and should not cause anyone to forego new proper planning.

More specifically, the 2017 Tax Act directs the Treasury to promulgate regulations6 necessary to carry out the purposes of the law with respect to differences in the exclusion amount in effect at the time gifts are made by the decedent and at the time of death. One of the purposes of this appears to be to prevent the “clawback” of the increased applicable exclusion amount or GST exemption that a donor previously utilized if the donor dies after the sunset of these provisions.

Portability and Gift and Estate Tax Exemptions

Portability became permanent law in 2013 and provides a means to transfer to a surviving spouse the unused gift and estate tax exemption of the deceased spouse (with certain notable limitations).7 The same logic and purpose regarding disallowing “clawback” should also be applicable to larger “portability” amounts of estate and gift tax exemption during the 2018 to 2025 exemption increase period, though arguably it may not be necessary because of the manner and application of the portability amount under current law.8 Moreover, the motivation is now greatly increased to elect portability and file the IRS Form 706 Estate Tax Return as is required to make the election (even when not otherwise due) in view of the new law.

Caution is advised as to the manner and planning techniques implemented to utilize the new increased exemption amounts. There should be enough time to do more sophisticated planning to best “leverage” the new exemption increases, both for estate and gift tax and GST tax, such as with permissible discounting and sales to intentionally defective grantor trusts (IDGTs). When there was uncertainty during the prior administration as to whether the law would be continued or exemption amounts lost, many clients made less tax-effective gift transfers that resulted in much less beneficial use of their exemptions, at times despite advice to the contrary. Also, attorneys and accountants must be mindful of the impact of the income tax basis for assets used in this planning and factor in the possible loss of a “step up” in basis of the assets at death9 versus the carry over of basis to a donee.10

Lastly, planners may want to review general financial powers of attorney to determine whether they are sufficient to allow the agent to make emergency gifts near the end of the period of increased exemption amounts in case the client lacks capacity to do so at a critical time.

Sources

1 Pub. L. No. 115-97 (Dec. 22, 2017) (sometimes referred to as “The Tax Cuts and Jobs Act”).

2 The 2017 Tax Act §11061(a).

3 These 2018 exemption amounts may be further adjusted slightly because of the change in index to be used.

4 See I.R.C. §2631(c).

5 See the 2017 Tax Act §11002.

6 See the 2017 Tax Act §11061(b) that also amends I.R.C. §2001(g) regarding computation of wealth transfer tax.

7 See I.R.C. §2010(c)(4). Note that portability is not available for GST tax.

8 See I.R.C. §§2010(c)(2) & (c)(4).

9 I.R.C. §1014.

10 I.R.C. §1015.

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