The “Tax Cuts and Jobs Act” made significant changes to individual and corporate taxes. In estate and gift taxes, the most significant change was the temporary increase of the estate, gift and GST tax exemption.
The act doubled the unified estate, gift and GST exemptions from $5.49 million to $11.2 million per person. Therefore, for a married couple, the exemption will be $22.4 million. However, the increased exemption will sunset at the end of 2025. On January 1, 2026, the exemption amount will be reverted to the 2017 level adjusted for inflation. The tax rate remains the same: 40% on the estate that exceeds the exemption amount. Additionally, prior to the passing of the new laws, the proposed regulations concerning business valuations under IRC Section 2704 were withdrawn. The regulations had caused many new planning speculations and were viewed as overly burdensome.
Considering these changes, there are possible planning opportunities:
- Review situs of any irrevocable trust. Use NING, DING, WING trust to shift income out of “high” tax states to reduce state income tax;
- With the increased exemption amount, make gift to existing trust or create new trust without incurring gift tax. Furthermore, consider using GST exemption to set up “Dynasty Trust” to benefit future generations;
- Due to the withdrawal of the IRC Section 2704 regulations, discounting may still be an available option to decrease the value of a gift;
- Review trust documents and structures to possibly step up basis. However, for asset protection trusts heightened precaution must be taken.
Despite these tax changes, estate planning is not just about estate and gift tax. Privacy, asset protection, and incapacity planning, among other things, are also good non-tax reasons to set up a comprehensive estate plan, especially considering the global change to transparency. For more on this topic click here.