Tax Provisions Impacting Estate Planning In the New Tax Act

December 29, 2017
Jonathan J. Russell

The new Tax Cuts and Jobs Act of 2017 (“2017 Tax Cuts Act”) signed by the President on December 22, 2017, P.L. 115-97 (115th Cong., 1st Sess.), contains important tax provisions related to estate planning. The most important such provision is the doubling of the Applicable Exclusion Amount for Federal Estate and Gift Taxes, described in Paragraph 1 below.

1. Doubling the Applicable Exclusion Amount for Federal Estate and Gift Taxes. The new law doubles of the estate and gift tax “Applicable Exclusion Amount,” from $5 million to $10 million, for gifts made, and estates of decedents dying, after December 31, 2017, and before January 1, 2026. (These amounts were previously adjusted for inflation.) This means that by employing appropriate estate planning measures, a married couple’s total exemption may be increased from $10 million to $20 million. By increasing the applicable exclusion amount, the new law automatically increases the Generation Skipping Tax (“GST”) exemption. Code Sec. 2631(c).

By way of Background:

a. A federal “gift tax” is imposed on certain lifetime transfers (Code Sec. 2511), and a federal “estate tax” is imposed on certain transfers at death. (Code Sec. 2001)

b. Under pre-2017 Tax Cuts Act law, the first $5 million (as adjusted for inflation in years after 2011) of transferred property was exempt from estate and gift tax. For estates of decedents dying and gifts made in 2018, this “basic exclusion amount” was $5.6 million ($11.2 million for a married couple).

c. For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the Act doubles the base estate and gift tax exemption amount from $5 million to $10 million. (Code Sec. 2010(c)(3), as amended by Act Sec. 11061(a).) The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).

d. The language in the Act does not mention generation-skipping transfers, but because the generation-skipping transfer tax exemption amount is based on the basic Applicable Exclusion Amount, generation-skipping transfers will also see an increased exclusion amount.

The bottom line is, clients having aggregate estates valued less than about $10 million will not need to worry about the Federal Estate or Gift Tax for the next 10 years. (Don’t forget, life insurance death benefits are included in your taxable estate.)

The increased Applicable Exclusion Amounts will “sunset” in 10 years. (Some clients may recall a similar provision in The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) which completely repealed the Federal Estate Tax in 2010, but “sunset” on December 31, 2010.) Unless Congress renews or extends the 2017 Tax Cuts Act’s increased Applicable Exclusion Amounts, those amounts will automatically expire on January 1, 2026, and the Applicable Exclusion Amounts will revert back to the current 2017 levels.

Please stay tuned for future developments. Our advice is that you should NOT eliminate any federal estate tax provisions, such as A-B trust provisions, in your existing Estate Plan documents.

2. Change in Indexing. The 2017 Tax Cuts Act retains the inflation adjustments to the Applicable Exclusion Amount and GST exemption provided under current law. However, starting in 2018, adjustments will be based upon the less generous “Chained Consumer Price Index for All Urban Consumers.”

3. Cash Gifts to Public Charities. The 2017 Tax Cuts Act increases the income-based percentage limit for certain charitable contributions by an individual taxpayer of cash to public charities and certain other organizations from 50% to 60%. This change applies to contributions made in any taxable year beginning after December 31, 2017, and before January 1, 2026. There is a five-year carryover for unused cash contribution deductions that are otherwise subject to the 60% limitation.

4. Charitable Gifts by ESBTs. The 2017 Tax Cuts Act modifies the rules regarding charitable contributions by an electing small business trust (“ESBT”). ESBTs are now subject to the rules applicable to individuals, rather than those applicable to trusts. Thus, for example, the percentage limitations and carryforward provisions applicable to individuals apply to charitable contributions made by the portion of an ESBT holding S corporation stock.

5. The Kiddie Tax. The 2017 Tax Cuts Act replaces the so-called “kiddie tax” with a rule taxing the net unearned income of a child at the ordinary income and capital gains rates applied generally to trusts and estates for the 2018-25 taxable years. In our view, this is a potentially disadvantageous change because the income tax rates for trusts and estates are generally higher than those for individuals, due to greatly compressed tax brackets.

6. Reporting by Buyer of Existing Life Insurance Policy. The 2017 Tax Cuts Act imposes new reporting requirements for the purchaser who buys an existing life insurance contract in a “reportable policy sale” and the insurer who pays death benefits on such policies.

7. Basis in a Life Insurance Policy. In determining the basis of a life insurance or annuity contract transferred during the owner’s lifetime, the 2017 Tax Cuts Act eliminates the current adjustment for mortality, expense, or other reasonable charges incurred under the contract, reversing the position taken by the IRS in Rev Rul 2009-13. This change applies to life insurance contracts entered into after August 25, 2009.

8. Transfers for Value. The various exceptions to the “transfer for value rules” will no longer apply in the case of a transfer of a life insurance contract, or any interest in a life insurance contract, in a reportable policy sale.

9. Miscellaneous Itemized Deductions. The 2017 Tax Cuts Act eliminates the individual tax deduction for miscellaneous itemized deductions that would otherwise have been subject to the 2% floor under Code Sec. 67 for the 2018-25 tax years.

10. Qualifying Beneficiaries of an ESBT. The new law permits a nonresident alien individual to be a potential current beneficiary of an ESBT, beginning January 1, 2018.

11. Pass-Through Businesses Owned by an Estate or Trust. The new law provides that, for the 2018-25 tax years taxable years, an individual taxpayer may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship. The new law extends this rule to interest owned by trusts and estates.

Please call or email us if you have questions about the 2017 Tax Cuts Act and how it impacts your current Estate Plan. We offer a free one hour estate planning consultation for any client wishing to discuss their estate planning needs.