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A New Landscape for Estate Planning

Scott T. Ditman, CPA/PFS
02.07.2018 | Client Alert

When the Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, the estate planning landscape was dramatically altered. Most significantly, the new law retained the federal estate, gift, and generation-skipping transfer (GST) taxes, but doubled their exemption amounts. As of January 1, 2018, individuals can shelter approximately $11,180,000 (indexed for inflation) from federal estate and gift tax as well as GST tax. Unfortunately, the new federal exemption amounts are set to “sunset” on December 31, 2025, reverting to their pre-2018 levels, as indexed for inflation. Due to this possible sunset, flexibility in all estate planning documents is paramount.

The ability of spouses to, consensually, use each other’s exemptions, known as portability, which remains unchanged under the new law, allows them to transfer approximately $22,360,000 (indexed for inflation) free of estate and gift tax during the spouses’ lives or at their deaths.

Also not affected by the new law, individuals may continue to make annual exclusion gifts of up to $15,000 per recipient in 2018, up from $14,000 in 2017. However, keep in mind that even for those who may not be subject to federal estate and gift taxes, there are state estate, gift, and inheritance tax issues that must be considered.

Despite the TCJA, You Still Need to Plan

Those living in the tri-state area must continue to be aware of their home state’s transfer tax implications. New York State, for example, while having no gift tax, currently has a $5,250,000 basic exclusion amount from estate tax for deaths occurring between April 1, 2017 and January 1, 2019. For deaths after January 1, 2019, the New York State basic exclusion amount is set to equal the pre-TCJA federal exemption amount of $5,600,000 (as of 2018; indexed for inflation) unless new legislation is enacted. Importantly, this exclusion disappears for estates in excess of 105% of the exemption amount. For Connecticut residents, there is both state estate and gift tax that must be considered. Finally, for New Jersey residents, although the Garden State has repealed its state estate tax, an inheritance tax still exists for assets passing to non-lineal descendants and other unrelated individuals. So, although federal estate and gift tax may no longer be an issue for many, clients in New York, Connecticut, and New Jersey may still require planning in consideration of these state imposed taxes.

Taxpayers should have all current estate planning documents reviewed to make certain that they continue to accurately reflect their intentions under the new law. In addition, estate liquidity needs should be reviewed, including the use of life insurance.

Be Watchful for Unintended Consequences

Unintended consequences of the temporary doubling of the exemption amounts may be seen in wills containing “formula” based trusts that automatically adjust for the changes in the exemption amounts.


An individual has an estate valued at approximately $11,000,000. His current Will distributes an amount, equal to his unused federal exemption, to a bypass trust for the benefit of his three children from a prior marriage and the remaining balance of his estate is directed to be distributed to a marital trust for the benefit of his current spouse. Under the new law and exemption amounts, his current Will would cause his entire estate to be distributed to the bypass trust (assuming no lifetime gifts were made), leaving nothing to be distributed to the marital trust for the benefit of his current spouse.

Planning Opportunities Using the Increased Exemptions

By doubling the exemption amounts, ultra-high net worth clients will have another opportunity to make significant lifetime gifts, thereby removing the post-gift income and appreciation of those assets from their estates. Although the new exemption amounts do not expire for some time, these individuals should consider securing their use as soon as possible. Moreover, with Applicable Federal Rates forecasted to continue to rise, these individuals should act as soon as possible and engage in strategies that rely on low interest rate planning techniques where appropriate. Techniques include:

  • Gifts/Sales to Intentionally Defective Grantor Trusts (IDGTs)/Generation-Skipping Trusts (GSTs): By making a complete sale, complete gift, or a combination of both to an IDGT/Generation-Skipping Trust, the grantor will still pay the income tax on the income generated by the trust, including capital gains tax, however, this will allow the property sold and/or gifted to the trust to grow for the beneficiaries outside of the grantor’s estate and unencumbered by income tax. Further, through the allocation of the grantor’s unused GST tax exemption to the trust, an amount up to that exemption may benefit several generations of the grantor transfer tax free.
  • Grantor Retained Annuity Trusts (GRATs): The taxpayer transfers future appreciation in assets, free of gift and estate tax, while retaining the right to receive an annuity from the property transferred to the GRAT for a term of years.
  • Charitable Lead Trusts (CLTs): For the charitably inclined, CLTs provide a similar opportunity to a GRAT except the income interest of the CLT goes to a charity rather than the grantor, and the remainder interest still passes to named beneficiaries.

Issues to Consider in Making Lifetime Gifts

Although a lifetime gift makes sense for some, making a large lifetime gift may not be an appropriate strategy for everyone, as some may wish to retain their wealth for their own use during their lifetimes, passing it to future generations only at death. Such married couples should consider creating Spousal Lifetime Access Trusts (SLATs), which provide a “financial safety net” for individuals and couples reluctant to part irrevocably with large sums. To create a SLAT, each spouse uses all or part of his or her remaining exemption amount to make an irrevocable gift to the SLAT for the benefit of the non-grantor spouse. The SLAT gives the non-grantor spouse access to the trust’s corpus as a discretionary beneficiary of income and principal so that the transferred amount is still accessible by the couple, if necessary.

Taxpayers must also determine whether gifting assets during their lifetime or continuing to own such assets until death is more advantageous. Assets that pass at death receive a “step-up” in basis equal to their fair market value at the date of death. In contrast, the recipients of assets gifted during life continue to have the donor’s same cost basis in such assets. Thus, for extremely low-basis assets, the potential for capital gains upon a sale by the recipient after the donor’s death needs to be taken into account, as any potential estate tax savings may be offset by the loss of the step-up in basis if gifted during lifetime.

Lastly, the changes to income tax created by the new law must be taken into account. Formerly, most trust planning generally relied upon the creation of grantor trusts (a trust where the grantor picks up all items of income, credit and deduction attributable to the trust property on his or her personal income tax return). Now consideration must be given to the loss of itemized deductions, personal exemptions, state and local income tax deductions, as well as the taxpayer’s state of residence in deciding how to proceed. With these changes to income tax, non-grantor trusts may be the more desirable vehicle for estate planning going forward.

The TCJA, while only temporary, is cause to rethink traditional estate planning given the doubled exemption amounts provide such valuable planning opportunities. Over time, more of the implications of the new law will be identified and the selection of appropriate estate planning techniques and strategies will be of the utmost importance.

Questions? Contact Scott T. Ditman at 212.331.7464 | sditman@berdonllp.com or your Berdon advisor.

Berdon LLP New York Accountants