Trusts & Estates Client Alert
The sweeping tax reform legislation passed by Congress and signed by President Trump on December 22, 2017 (commonly called The Tax Cuts and Jobs Act, or the “Act”) made significant changes to the federal estate, gift, and generation-skipping transfer (“GST”) tax laws. Further, Maryland and DC lawmakers have responded with adjustments to local estate tax laws, and more legislation is on its way.
Many individuals may be able to take advantage of estate, gift, and GST tax planning opportunities created by the Act. It is important to note, however, that the Act’s provisions are scheduled to expire at the end of 2025.
In addition, some individuals may need to modify their estate plans to avoid unintended (and potentially unwanted) consequences resulting from the Act. With these considerations in mind, we have endeavored to broadly highlight the key opportunities (and potential pitfalls) that may affect your estate plan. We encourage to review your existing documents in light of the discussion below. Please call us if you would like to go through this together or discuss how the recent federal and state estate tax changes may impact you specifically.
Key Provisions of the Act
- Doubles the exemptions for federal estate, gift, and generation-skipping transfer taxes to $10,000,000 per individual, indexed for inflation as of 2011 (producing an $11.18 million exemption from each tax for 2018).
- Maintains “portability” of the federal estate and gift tax exemption between spouses. This allows a surviving spouse (in certain cases) to apply his or her deceased spouse’s unused exclusion amount against transfer tax liability arising from subsequent lifetime gifts and transfers at death.
- As under previous law, the GST exemption is not “portable.” Your plan may not involve the GST tax. The GST tax is a tax imposed on certain transfers to grandchildren and more remote descendants (including some outright gifts and distributions from trusts). It is a tax imposed in addition to the estate and gift tax.
- Sunsets the increased exemption amounts on December 31, 2025. Unless Congress extends or modifies the above changes, the estate, gift and GST tax exemptions would return to $5,000,000 (indexed for inflation as of 2011). As a point of reference, the 2017 federal exemption was indexed to $5.49 million.
State Specific Issues and Exemptions
- Earlier this month, Maryland lawmakers passed legislation preventing the scheduled “recoupling” of the Maryland and federal estate tax exemptions in 2019. As a result, Maryland’s estate tax exemption (currently $4 million), will settle at a flat $5 million beginning in 2019, with no adjustment for inflation. “Portability” will be available for spouses meeting certain requirements beginning in 2019. When portability is available, the unused exemption amount of the last predeceased spouse will be limited to the amount of the Maryland exemption in effect at the time of the last predeceased spouse’s death.
District of Columbia
- At the end of 2017, the DC Council enacted legislation to make clear that the DC estate tax exemption will match the new federal exemption beginning in 2018. However, ten DC Councilmembers have recently introduced a bill that would “decouple” the DC and federal estate tax exemptions by reducing the DC exemption to $5.6 million (indexed for inflation) for persons dying after December 31, 2017. A majority on the DC Council supports the bill, which is currently under Council Review.
We are continuing to watch this bill.
- As under previous law, the DC estate tax exemption is not portable between spouses.
- Virginia does not impose any state estate, gift, or GST taxes.
Persons with formula clauses in their wills or trusts should evaluate their effect under the new tax laws. Formula clauses are frequently used to pass the amount of available estate and/or GST tax exemptions to a trust for descendants (or to a trust for the surviving spouse and descendants) while having the remainder pass to the surviving spouse (outright or in trust). Because of the drastic increase in the federal exemptions, these clauses may result in unintended consequences for your beneficiaries.
For instance, if you died in 2017 with a $10,000,000 estate and a will or trust that left an amount equal to the applicable federal estate tax exemption to a trust for your children and the remainder outright to your surviving spouse, the formula would cause $5,490,000 to pass your children’s trust and $4,510,000 to your spouse. But if you die in 2018 with the same plan in place, the formula would pass all $10,000,000 to the trust for your children and leave nothing to your spouse. As noted above, state exemptions could vary from federal exemptions as well. Any plans involving a formula tied only to the federal estate tax exemption should be reviewed to make sure that a lower state exemption does not produce an unintended result.
Similar issues could arise with bequests to grandchildren or trusts for their benefit based on the generation-skipping transfer tax amount.
Some clients may wish to take advantage of the above changes by taking one or more of the following actions:
- Making large lifetime gifts (outright or in trust – including a trust for a spouse) to utilize the increased estate, gift, and GST tax exemptions. Under the Act, an individual may now transfer over two times the amount he or she could have transferred in 2017 without current gift tax or future GST tax liability.
- Creating trusts that will make use of your GST tax exemption and/or allocating GST tax exemption to existing trusts that could be subject to GST tax in the future.
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Again, we encourage you to review your documents in light of the discussion above. If you believe any of these changes may affect your estate plan, or if you have any questions, please contact any of our estate planning attorneys for more particular assistance.