Alert December 22, 2017

New Estate, Gift and GST Tax Provisions in Tax Reform Legislation

Summary
A major tax reform bill was signed into law on December 22, 2017. This bill doubles the federal estate, gift and generation-skipping transfer tax exemptions for transfers occurring in 2018 through 2025. Depending upon the terms of your estate planning documents, the increase in the exemption amount could alter the intended disposition of your assets at your death. Other provisions of the Act may require you to consult with your accountant for income tax planning purposes.

Transfer Tax Changes

The new law doubles the federal estate, gift and generation-skipping transfer (“GST”) tax exemptions from $5.49 million ($5 million indexed for inflation) to an estimated $11.2 million ($10 million indexed for inflation), effective for transfers occurring after December 31, 2017. This increase is set to expire at the end of 2025, at which time the exemption will return to $5 million (indexed for inflation from 2011) for transfers occurring in 2026 and beyond. The rate for each of these taxes remains at 40%. The Massachusetts state estate tax is not affected by this new legislation and remains in effect, applying to any estate valued at more than $1 million (not indexed for inflation).

Impact on Individual Estate Plans

While many existing estate plans contain formulas which will allow you to get the maximum tax benefits from the new higher exemption amounts, we strongly recommend that you review your particular plan to make sure that the formulas produce results which continue to be consistent with your personal goals. This is of particular importance for those individuals who reside in a state that does not impose its own state estate tax, such as New Hampshire or Florida; for blended families; and for those individuals who are married but also have children from a prior relationship.  

Examples of Impact on Individual Estate Plans

If your estate plan divides assets by sending an amount equal to the federal exemption to a Family Trust (typically for the benefit of the surviving spouse and descendants or, in some cases, just for descendants) and the balance to your spouse (or a trust for your spouse), the increased exemption amount will impact your plan as follows:

  • Under prior law:
    • Family Trust funded with up to $5 million (indexed for inflation); and
    • Spouse or Trust for Spouse receives the balance, if any.
  • Under new law (January 1, 2018, through December 31, 2025):
    • Family Trust funded with up to $10 million (indexed for inflation); and
    • Trust for Spouse or spouse receives the balance, if any.
    • Impact: This could reduce or eliminate the amount set aside for the surviving spouse’s sole benefit.  

Your estate plan may divide assets by sending an amount equal to the federal exemption to a trust for your spouse and the balance outright to your spouse. Similar to the example above, the increased exemption amount will have a major impact on your plan. The first $10 million (indexed for inflation) will be held in trust, with a reduced amount (or nothing) passing to your spouse directly.

If your estate plan divides assets by sending an amount equal to the GST exemption to a GST Family Trust or GST Trusts for Descendants and the balance outright to your descendants, the increased exemption amount will impact your plan as follows:

  • Under prior law:
    • GST Family Trust or GST Trusts for Descendants funded with up to $5 million (indexed for inflation); and
    • Your descendants receive the balance, if any, outright.
  • Under new law (January 1, 2018, through December 31, 2025):
    • GST Family Trust or GST Trusts for Descendants funded with up to $10 million (indexed for inflation); and
    • Your descendants receive the balance, if any, outright.
    • Impact: This could reduce or eliminate the amount your descendants receive outright.  

These examples are just a few of the more common types of formulas included in estate plans that will be impacted by the change in the law. You may be comfortable with the result produced by your plan under the new law. If not, in many instances a simple change such as a cap on funding amounts may address any concern. You also may wish to revise your plan more broadly to take advantage of the opportunities afforded by larger exemption amounts. It is very important that you review the terms of your estate plan to ensure it continues to achieve your goals and makes use of the increased exemption while it is available if that makes sense given your personal circumstances. Please contact us to discuss any potential changes to your plan.

Gift Tax and GST Tax Planning Opportunities

Since the new law increases the exemption for gifts as well as transfers at death, clients who are comfortable making large gifts should consider making gifts to use some or all of the increased exemption before it expires at the end of 2025.  Please contact us to discuss the most advantageous ways to make use of your exemption during your life.

Other Provisions of Interest in Tax Reform Legislation

Changes in Charitable Contribution Deductions

  • The limit for cash contributions to public charities, certain private foundations (primarily private operating foundations) and governmental units is increased from 50% to 60% of a taxpayer’s adjusted gross income.
    • Effective date: Taxable years beginning after December 31, 2017, and before January 1, 2026.
  • Currently, donors who make contributions to colleges and universities in exchange for the right to purchase tickets to athletic events are able to deduct 80% of the value of that contribution. That deduction is eliminated under the new bill.
    • Effective date: Taxable years beginning after December 31, 2017.

Qualified Section 529 Tuition Savings Plans and ABLE Accounts

  • Up to $10,000 per beneficiary of elementary and secondary school tuition expenses can be paid for annually from qualified section 529 tuition savings plans. Formerly, funds from these accounts were reserved for payment of post-high school educational expenses only.
    • Effective date: Contributions made after December 31, 2017.
  • Amounts held in qualified section 529 tuition savings plans can be rolled over into tax-advantaged savings accounts for individuals with disabilities and their families (ABLE accounts) that can be used for disability-related expenses. The amount rolled over when added to all other contributions to the ABLE account cannot exceed the annual exclusion amount ($15,000 in 2018).
    • Effective date:  Distributions made after date of enactment and prior to January 1, 2026.  

Income Tax

  • There are a number of changes to the individual income tax provisions. Among them are changes to the income tax brackets, the standard deduction, itemized deductions and deductions for mortgage interest, state and local taxes, tax preparation services, medical expenses and others. Please consult your income tax preparer for more information.
    • Effective date: Taxable years beginning after December 31, 2017. Some provisions will expire for taxable years beginning January 1, 2026.