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Estate Planning

The Tax Cuts and Jobs Act and the Transfer of Wealth

By August 24, 2018May 27th, 2019No Comments

Under the newly enacted Tax Cuts and Jobs Act, the Federal estate, gift and generation-skipping tax (GST) lifetime exemption amounts have now increased to $11.18 million for individuals and $22.36 million for married couples. After increasing with inflation each year through 2025, the exemption amounts will revert back to the 2017 levels ($5,490,000 and $10,980,000) on Jan. 1, 2026. These substantial, yet temporary, increases in the exemption amounts present a unique opportunity for the implementation of various estate planning techniques that will allow the transfer of wealth to future generations.

Although this dramatic increase at the Federal level is no doubt beneficial, New Yorkers with significant wealth must be cautious. The current New York estate tax exemption remains at $5,250,000 and will rise only to $5,490,000 in 2019, indexed for inflation. As a consequence of this decoupling, although a New York resident may avoid Federal estate tax, he/she may still incur New York estate tax. New Yorkers should heed the “estate tax cliff” or risk incurring a significant estate tax liability. If the amount of a New York resident’s taxable estate is more than 5% higher than the New York exclusion amount at the time of death, none of the New York estate tax exemption will be available for use. An estate under these circumstances would be taxed in its entirety. As a side note, a decedent’s remaining lifetime exemption is only portable for Federal purposes. Proper planning must be executed at the state level to ensure maximum use of the lifetime exemption.

To illustrate the benefits of reviewing an estate plan, let’s take a look at a married couple in New York. The wife owns property worth $2.5 million and the husband holds his own assets of $4.5 million. As of 2012, the wife’s will directs the maximum amount of New York estate tax exemption to fund a credit shelter trust, which at the time was $1,000,000. The remainder would be passed to the surviving spouse and qualify for the marital deduction. If the wife passed away this year, $1.5 million of New York state estate tax exemption would be forfeit. This situation would transfer the $1.5 million directly to the surviving spouse and push his total estate over the New York cliff to a total of $6 million. Revisiting her estate plan, the wife could change her will to pass her entire $2.5 million in trust, making full use of her New York state exemption amount. The whole $2.5 million would pass in trust estate tax free and the surviving spouse’s estate of $4.5 million would be completely shielded from Federal and New York estate tax. This is just one example of the benefits of taking a second look at a wealth transfer strategy.

It should be noted that New York State does not require state gift tax filings. The tax on gratuitous transfers of property in New York was repealed in the year 2000. However, as of April 1, 2014, any gifts made by a New York resident decedent within three years of the date of death will be pulled in and added back to the taxable estate. This rule expires as of January 1, 2019.

On the other hand, residents of the state of Connecticut are subject to state gift tax filing requirements. For Connecticut residents, on January 1, 2018, the state estate and gift tax exemption increased from $2 million to $2.6 million. An additional increase to $3.6 million will occur on January 1, 2019. New Jersey residents will be happy to hear that, effective January 1, 2018, the estate tax has been fully repealed. Additionally, New Jersey residents are not subject to state gift tax filing requirements. However, the New Jersey inheritance tax is in full effect, which means that every beneficiary who is not a spouse, domestic partner, child, grandchild, great-grandchild, parent, grandparent, or stepchild will incur a “beneficiary” tax based on the amount received. This is in contrast to the estate tax which is instead imposed on the value of the taxable estate. The inheritance tax rate is graduated, maxing out at 16%.

In order to leverage their gift and GST exemptions, taxpayers can also utilize advanced wealth transfer techniques. These include sales to defective grantor trusts or the funding of grantor retained annuity trusts (GRATs) and split-interest charitable trusts. It is important to note that certain of these techniques are more effective in a low interest rate environment. With interest rates expected to rise significantly, it may be advantageous to act in the near future. Another planning technique to consider is “uptransferring” to parents and grandparents in order to achieve a stepped-up basis in gifted assets.

As mentioned earlier, we recommend that you review the terms of your wills and revocable trusts at this time to ensure they remain in accordance with your wishes. If your post-death trusts are funded according to a formula clause tied to the exemption amount, they may need to be revised to coincide with the new larger exemptions.