Finding your benefits in estate tax planning

Multistory buldingMany taxpayers aren’t approaching estate tax planning with the same urgency following enactment of the Tax Cuts and Jobs Act (TCJA). This is a mistake. Estate planning remains a vital tool for both tax and non-tax purposes.

While it’s true that the doubled estate and gift exclusion under TCJA could potentially subject thousands fewer taxpayers to the estate tax, this change is not permanent. There is a very realistic possibility that the exemptions will expire as scheduled or be repealed early, so taxpayers should be considering gifting strategies that use the exemptions before they are gone. Estate planning also remains a vital tool for dealing with state transfer taxes and nontax issues such as protecting and managing future wealth for the next generation.

This Private Company Insights provides an overview of the gift and estate tax landscape and highlights specific areas where estate planning can be beneficial.

Current law and future changes The TCJA doubled the combined gift and estate tax exclusion to $10 million plus an annual adjustment for inflation. For 2019, the exclusion is $11.4 million per individual, meaning a married couple can pass $22.8 million to their heirs tax-free. According to estimates, this has resulted in two-thirds fewer taxpayers being subject to the tax, but the change is only temporary. The doubled exclusion is set to expire at the end of 2025, at which point it will be cut in half. Amounts exceeding the exclusion thresholds are taxed at a top rate of 40%.

Doubled exemption a ‘use it or lose it’ benefit The temporary nature of the doubled exemption initially left some taxpayers reticent to take advantage of it, fearing the IRS could “claw back” gifts made under the doubled exemption and tax them under a smaller exemption if the taxpayer died after the exemption was reduced. The IRS has issued proposed regulations assuring that the benefit will be honored to the extent it is utilized to make gifts during a taxpayer’s lifetime. On the flip side, if taxpayers wait too long to start gifting strategies, they may lose the full benefit when it expires or is repealed. The rules provide that the estate tax can be determined using the exemption amount allocated to gifts made during the double exemption period or the exemption amount at the time of death, whichever is greater. Thus taxpayers who do not fully gift against the doubled-exclusion amount before 2026 forfeit the remaining portion.

Preparing for future changes While it is possible that Congress could make the doubled exemption permanent by 2026, the current uncertain political climate may make it more prudent to plan as if it will expire and revert to prior levels or be reduced even further in the future. Several Democrats, including candidates vying for the 2020 Democratic nomination for president have supported imposing a tax on wealth, increasing the estate tax or undoing some or all of the TCJA.

This type of uncertainty is not new. Although the modern estate tax went largely unchanged for the better part of a century, the estate tax rates and exemption amounts have gone through numerous fluctuations since. The 2001 and 2003 tax cuts provided a one-year lapse of the estate tax and generation-skipping tax entirely. Taxpayers who made the most of the temporary relief from the generation-skipping tax were the ones who truly benefited. This remains the best approach for taxpayers today.

Additionally, there are proposals under consideration for changes in widely used estate planning techniques that should be taken advantage of before any rule changes. The proposed changes include changes in the valuation rules for family entities, such as family partnerships and other family-owned businesses, and provisions restricting the use of grantor retained annuity trusts.

State-level implications Regardless of how the federal gift and estate tax evolves, estate planning is still important for state tax purposes. Twelve states, along with the District of Columbia, impose an estate tax and Connecticut also taxes gifts. While some states have worked to repeal such taxes in recent years, others are turning to them to bolster revenue. California, for example, will have ballot proposition in 2020 to reinstitute its estate tax and to impose a gift tax for the first time. Double taxation notwithstanding, the impact of gift and estate taxes at the state level can be still significant. Eight of the states with an estate tax offer an exemption below the current federal exemption, meaning estates in those jurisdictions may be faced with a substantial tax bill despite having zero liability for federal purposes.

Taxpayers that reside in states that do not have an estate tax can still be impacted by other states’ estate tax regimes if the taxpayers own property located in states with an estate tax. This is most commonly seen in situations where the taxpayers own a vacation home or other property in a state that has an estate tax. For example, a beach house or a family farm in another state may be subject to an estate tax in the state that the property is located.

Income tax considerations The TCJA made several income tax changes, most notably a sharp reduction in the corporate tax rate to 21%, which are affecting tax planning for private companies. It is important for taxpayers to keep estate taxes in mind when doing individual tax planning in response to TCJA changes. For example, the lower corporate rate may tempt pass-through companies to consider converting to a C corporation, but this change can have significant estate tax consequences. Proper estate planning can help taxpayers see the full picture and weigh those benefits against the impact they may have on estates.

Non-tax reasons for estate planning There are several important non-tax reasons for proper estate planning, many of which will evolve over time. It is vital for taxpayers to periodically review their estate plans as proper planning can ensure family and loved ones are taken care of and provided for.

For parents of minor children, naming a legal guardian is among the most consequential estate planning actions. Guardians not only care for and raise a child, they’re responsible for safeguarding the child’s property and assets. These functions can be performed by a single guardian or shared between guardians. It’s important for parents to carefully assign these duties to one or more trusted individuals. Some guardians may be well-suited for looking after the child’s assets, but may not be ideal for looking after the child, and vice versa. The use of trusts can also be helpful in this regard.

Once the children have reached an age of majority, they are considered adults in the eyes of the law, but may not be equipped to handle the responsibility of a substantial inheritance. Instead of giving them an inheritance outright, the property can be placed in trust so that the child will have the benefit of the property without having more responsibility than they can handle. A trust can continue to be useful even when the child becomes capable of managing a sizable inheritance. Property held in trust can be protected from the creditors of the beneficiary and can provide for protection from spouses of the beneficiary in cases of divorce.

Trusts can also be used in a similar manner to provide for the support of a surviving spouse while protecting the interests of the children. The typical marital trust allows the surviving spouse to receive income of the trust with the remainder of the assets passing to the children at the surviving spouse’s death. The surviving spouse often has access to the underlying assets of the trust for specific needs.

Next steps There are many important tax and non-tax reasons to focus on your estate plan. The most immediate and pressing opportunity is the doubled gift and estate tax exemption, but a comprehensive and customized estate plan can provide significant value in the long run.

For more information contact:
Mark Margulies
National Tax Leader
Private Client Services
T +1 954 331 1116

Brad Roe
Managing Director
Washington National Tax Office
T+1 832 476 5080

To learn more visit

Mike Ban
National Managing Principal
Private Wealth Services
T +1 212 542 9560

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