On Wednesday, June 13, Wesley Yang, Partner and Chair of the firm’s Taxation Practice Group, gave a presentation entitled “Impact of the 2017 Tax Cuts and Jobs Act on Estate Planning”
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, (“2017 Tax Act”) and the bill went into effect on January 1, 2018. This legislation will affect both individuals and businesses. Wes outlined some of the main points to consider, below.
Changes Made by the 2017 Tax Act
- Doubled the gift, estate and generation skipping tax exemption, but that change expires 12/31/2025.
- Previously, it was $5.0 million indexed for inflation starting in 2012; now it is $10.0 million, again indexed starting in 2012.
- Indexing causes the 2018 exemption amount to equal $11.18 million.
- It is unclear what happens when the exemption amount “snaps back” from $10.0 million to $5.0 million in 2026.
- If someone has used an amount of the exemption between the lower and the higher figure for gifts and then dies, or if one spouse has died, and made a portability election to transfer the higher amount to the survivor, what happens? Does the lower or higher figure apply? No one knows at this point.
- Increase in charitable income tax deduction cap for cash gifts from 50% to 60%.
What Didn’t Change
- Step up (or down) in basis of assets at death remains in place.
- Portability election to transfer unused estate or gift tax (but not generation skipping tax) exemption from the first death of a married couple to the survivor is still available.
- Pennsylvania inheritance and estate taxes remain unchanged.
- For Pennsylvania inheritance tax purposes, gifts or transfers made at least one year before death are excluded from the taxable estate; gifts or transfers made within one year are included fully.
What to do now?
Review your existing estate plan for appropriateness, including ensuring Durable Financial Powers of Attorney and Living Wills/Healthcare Powers of Attorney are in place.
- If the combined assets of a married couple are well below $11.18 million, consider leaving all assets to a survivor outright, to achieve basis step up at the second spouse’s death.
- Caution: doing this permits the surviving spouse to change the plan after the first death, particularly if remarriage is a possibility. This result can be mitigated through the use of trusts.
- Alternative approaches:
- Aggressive approach: Consider planning as if the $11.18 million exemption amount was permanent, with the intent to change your plan if necessary if we get closer to 2026 and it does not appear that the higher exemption amount will be retained.
- Conservative approach: Consider planning as if only the lower exemption amount was available, with the intent to change plan if appropriate if we get closer to 2026 and it appears the higher exemption amount will be retained.
- Which approach to use is obviously highly dependent on net worth, age and psychological factors.
- Emphasis may shift from estate tax avoidance to tax basis planning.
- Example: In order to save Pennsylvania inheritance taxes, parents make a gift of their house to their children. However, because the children now have inherited the parents’ low tax basis in the house, the income taxes incurred upon a later sale may be far greater than the inheritance taxes saved.
- The use of discounting techniques, such as a family limited partnership, may now be inappropriate, as it would result in a step down in basis, instead of a step up. If one already has a family limited partnership, consider unwinding it, unless there are non-tax reasons for its existence.
- If you are fortunate enough to have assets in excess of $22 million (or if there is a possibility of such in the future, such as holding stock in the next Google), consider substantial lifetime gifts using dynasty trusts to permanently exempt such assets from the transfer tax system.
- A dynasty trust is an irrevocable trust that benefits successive generations of heirs.
- Non-tax reasons to do estate planning with trusts regardless of taxes include:
- Minor children
- Children with disabilities
- Children with problems handling money or in a bad marriage
- Desire to ensure inheritances remain in family hands, despite divorce
- Succession planning for family businesses
If you have any questions about the 2017 Tax Cuts and Jobs Act, or its impact on estate planning, please contact Wesley Yang.
Wesley Yang is a Partner with Leech Tishman and Chair of the firm’s Taxation Practice Group. Wes is based in the Pittsburgh office and is also a member of the Corporate and Estates & Trusts Practice Groups. Wes can be reached at 412.261.1600 or wyang@leechtishman.com.
Leech Tishman’s Facebook Page: https://www.facebook.com/leechtishman
Leech Tishman’s Twitter: https://twitter.com/LeechTishman
Leech Tishman’s Company Page on LinkedIn: https://www.linkedin.com/company/leech-tishman
Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in alternative dispute resolution, aviation & aerospace, bankruptcy & creditors’ rights, construction, corporate, employee benefits, employment, energy, environmental, estates & trusts, family law, government relations, immigration, insurance coverage & corporate risk mitigation, intellectual property, international legal matters, litigation, real estate, and taxation. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in El Segundo, CA, Chicago, Los Angeles, New York, Sarasota and Wilmington, DE.