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Estate Planning Uncertainty Under the TCJA

October 30, 2018

Heather Oboda, CPA, MBA

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As seen in the Westchester and Fairfield Business Journals.

There’s a key element of the Tax Cuts and Jobs Act of 2017 (TCJA) that everyone seems to be talking about: estate planning. Under the TCJA, the estate tax exclusion amount has been raised significantly. A single person now has an $11,180,000 ($11M) lifetime exclusion and a married couple can have up to a $22,360,000 ($22M) exclusion. There have been many reactions to this element of the TCJA, many of which are misguided.

One reaction is for single taxpayers with estates under the $11M exclusion amount to assume that they don’t have to alter their plans. However, New York has different rules than the new federal law. New York has a “cliff,” not an exclusion, and for 2018 that cliff amount is $5,250,000 ($5M). It is called a cliff because, once you exceed $5M, you could be paying $2 of taxes to New York for every $1 over the cliff amount. Though New York’s transfer tax policy is expected to match the federal policy by January 1, 2019, the cliff amount will only go up to $5.6M at that time, the amount the federal exemption was expected to be indexed to for inflation, before the TJCA changed the federal exemption. Therefore, in cases where a New York estate is between $5.6M and $11.2M, planning is encouraged to mitigate state estate tax. If you don’t live in New York, you should educate yourself on your state’s rules. 

Even those who have already planned their estate should take another look at their will, as the new law will sunset in 2025, potentially leaving your estate at risk for a full decade. In the case of some older estate plans, many people still assume their assets will be distributed in a certain way, however, their wills may now be out of date. For example, take a married couple with $11M in assets in the husband’s name. Prior the TCJA, the couple left provisions in their will for a trust to be funded for their grandchildren at an amount not exceeding the generation skipping exemption (GST). This plan may have been sufficient when the exemption amount was $1M or $5M. If the husband were to pass now, the trust will receive the full $11M in assets and the surviving spouse will be left broke. So, be brave, open that wall safe, and review your will or revocable trust documents with your advisor to see if your original plan still upholds.

In some cases, a surviving spouse chooses not to file because each spouse has below $11M in assets and together they are under the $22M exemption, assuming they avoid the transfer tax. However, this only holds true if an estate tax return has been filed electing for portability. Portability is when you use the decedent spouse’s unused estate tax exemption and add it to the surviving spouse’s exemption. Unfortunately, portability is only a federal option, not applicable in New York. Many spouses have “I love you wills,” so that, when one spouse dies, the estate assets transfer to the surviving spouse. Some people don’t want to take the time or expense to file an estate tax return when the first spouse dies, but this could be a bad choice. What if the market sky rockets? What if you win the lotto? Or, more practically, what if you pass away after 2026 and your taxable estate is now $16M but the present estate tax provisions have sunset, and the estate tax exemption returns to $5M? Your estate will be paying tax on $11M, so your heirs would be receiving less money. 

Other reactions include taxpayers considering the option of using up as much of the $11,180,000 exclusion now, through gifting. Some are in favor of gifting to the younger generations, especially the $15,000 annual exclusion. The issue still outstanding with larger gifts is that the Treasury hasn’t yet given any guidance on what happens in 2026 after the estate tax provision sunsets and we go back to a lower exclusion amount. We also can’t forget that current provisions could also be altered or revoked with a change in the political administration, before the scheduled sunset date of 2025. Will the gifts over the $15,000 annual exclusion be required to be added back to the estate? If they are, you will be no worse off than if you never made the gift. If they are not, you removed a lot of assets from your estate. 

Gifting low-basis assets is another option that may not be prudent. When you gift assets, the recipient gets your carry-over basis. Under the TCJA, there is still a step up in basis at death, whether or not you have a taxable estate. As an example, if you have property you bought for $50,000 that is now worth $750,000, a gift would result in the recipient getting a basis in the asset of $50,000, but if the property were inherited, the basis would be $750,000, or the fair market value at the date of death. When the property is sold, the recipient would save $140,000 in income tax if they were to receive the property at your death, as opposed to receiving the gift during your lifetime. An option is to make your annual exclusion gifts, and to start thinking about what you are comfortable doing in terms of larger gifting. Remember, once you gift it away, you may not be able to get it back.

In conclusion, don’t be penny wise and pound foolish. Take the time to review your documents, make educated decisions, and don’t get all of your advice from your friend, unless your friend is an estate planning professional.