2018 Estate Tax Planning: A Window of Opportunity

October 11, 2018

The Tax Cuts and Jobs Act (“TCJA”) impacts individual taxpayers, regardless of your level of income and net worth. If you are a U.S. citizen or resident with a net worth between $5 and $10 million, the increase in the estate tax exclusion amount from $5.49 million (indexed) in 2017 to $11.18 million (indexed) in 2018 means you may have moved from a taxable estate to a non-taxable estate. If your net worth is in excess of $10 million, the increase in the amount of your non-taxable estate is dramatic with the nearly doubling of the estate and gift tax exclusion.

The increased exclusion amount is on a limited timetable, and you could lose it if you do not utilize it by the end of the year 2025 when the law sunsets, or even sooner if the law is changed under a new Congress or Administration.

Strategic Gifting

In light of the scheduled 2025 sunset and the reversion of the exclusion back to $5 million, you may be looking for the best strategy to utilize the increased exclusion amount. Currently, an individual has an $11.18 million exemption. A gift of $11.18 million before the sunset will remove the excess exclusion amount from being subject to estate tax. If you are married and alone contribute an $11.18 million gift and the sunset occurs, then your spouse is still left with $5.49 million. If you and your partner split the $11.18 million gift and sunset occurs, you would be left with little to no exemption post-2025. The IRS may adopt regulations that provide an ordering rule for determining how the exclusion portions are used for gifts.

If the IRS follows rules on the transferability of a pre-deceased spouse unused exclusion (“DSUE”) amount, lifetime gifts made prior to the sunset would be charged the exclusion amount in excess of the sunset amount. For example, if you make a $5 million gift in 2018, in 2026 your 2018 gift would be charged the exclusion amount prior to the sunset. However, until the IRS issues guidance the only clear way to ensure the utilization of the larger exclusion amount is to make gifts of $11.18 million. The following are suggestions to consider when making large gifts during the pre-sunset period:

  • If you are a married couple that is planning an $11.18 million gift, avoid electing gift splitting in order to potentially preserve the post-sunset exclusion of the non-gift splitting spouse.
  • Make a $5 million gift and continue to monitor the estate tax exclusion, guidance from IRS, and potential new administrations prior to sunset.
  • Take a wait and see approach – until IRS guidance is issued relating to the exclusion ordering rule, hold off on large gifts. Keep in mind that the wait and see approach continues to keep assets and future appreciation in estates.

With the increased exclusion amount, you may be reluctant to make large gifts to your children and grandchildren outright or even through a protected trust arrangement. Your concerns may include how a gift will affect your lifestyle, asset protection and impact for future generations, and the possible effect of future unknown emergencies or world-wide tragedies. There are a number of strategies, such as a spousal lifetime access trust, established for the spouse and children, which can be implemented to address concerns and provide a high level of comfort for clients making larger gifts.

Estate Planning

Key estate planning opportunities available with the new $11.18 million exclusion (indexed) or below this amount but above the 2025 sunset exclusion amount ($5 million indexed) include some of the following:

  • Maximize annual exclusion gifts per donee (2018-$15,000 individually or $30,000 jointly)
  • Directly pay educational institution for your children’s and grandchildren’s education
  • Front load 529 plans for future generations – $75,000 per donee
  • Engage in asset-protection strategies (divorce, lawsuits, malpractice)
  • Avoid probate and enhance privacy protection
  • Shift future appreciation of assets to future generations
  • Protect future generations from potential issues with addiction, money management issues, divorce or specifying the purpose of assets for use
  • Transfer wealth with flexibility to control investment decisions and future beneficiaries as well as assess to income
  • Maximize your charitable deduction and minimize income tax exposure while retaining an income stream

Is Estate Planning in 2018 with the increased exclusion still relevant?

Yes. While the above highlights some planning ideas to minimize your estate taxes, there are still plenty of non-tax reasons for your estate planning. Wills and revocable trusts are used every day to ensure assets are passed down as intended. Revocable and irrevocable trusts also add a layer of privacy to your affairs that a will and probate court do not provide. Trust planning has also increased in popularity as more and more jurisdictions implement Domestic Asset Protection Trust (“DAPT”) statutes, which may allow you to protect your current assets against future lawsuits, malpractice, or even a divorce. Trusts can also reduce the costs of administering your estate.

Estate planning allows you to control how your assets are used by subsequent generations, ensuring they are productive members of society. Trusts can also be used to preserve government benefits personally or for special needs children.

Action Steps

If you have questions and would like some help navigating the complex world of estate planning, reach out to the professionals with Cherry Bekaert’s Estates & Trusts team. We have diverse experience in many areas of estate and trust planning, as well as wealth management. We are happy to start the conversation with you – and give you some peace of mind.