Don’t Miss the Sunshine – Time to Review your Estate Plan, Trusts, and Gifts
By Melissa Faith Davis, CPA
One of America’s most quoted writers, William Arthur Ward, said “Opportunities are like sunrises. If you wait too long, you miss them.”
In light of the new Tax Cuts and Jobs Act of 2017 (the Act), which was signed into law on December 22, 2017, there is no better time than now to review your estate plans, trust documents, and gift plans.
The estate, gift and generation-skipping transfer tax exemption has more than doubled as of January 1, 2018, increasing from $5.49 million in 2017 to $11.2 million per taxpayer. What is the result? Fewer estates will be subject to tax, and the larger estates will owe less tax. The Joint Committee on Taxation estimates the number of taxable estates would drop from approximately 5,000 under current law to 1,800 under the new law in 2018. By comparison, 52,000 estates paid the tax in the year 2000 when the exemption was $675,000.
Don’t miss this eight-year window of opportunity, which will sunset in 2025 (as long as a new administration does not make changes). For decedents dying and gifts made after 2025, the basic exclusion will revert back to $5 million, indexed for inflation. This means that any person who can afford to do so may want to use his or her exemption for gifts. For married couples, they have an opportunity to gift or transfer at death an extra $22.4 million. Although not enacted by the Act, the annual exclusion gift amount per individual in 2018 has increased to $15,000. This means that a married couple may give $30,000 total to another individual on an annual basis to as many individuals as they wish without encroaching on the $22.4 million exemption.
Another important aspect of this special opportunity is the expanded generation-skipping transfer tax (GST) exemption. Similar to the gift and estate tax exemption, the GST exemption amount affecting transfers to grandchildren and more remote generations also doubles in 2018 to $11.2 million per individual or $22.4 million per married couple. The benefits of funding dynasty trusts that last for generations will be amplified with the increased GST exemption amount.
Similar to individual tax rates, the Act reduces estate and trust fiduciary income tax rates. Income tax rate structure for estates and trust is replaced with the following tax brackets: 10% up to $2,550; 24% between $2,551 and $9,150; 35% between $9,151 and $12,500. The 37% top tax bracket was reduced from 39.6% in 2017 and applies to taxable income over $12,501 contained within the trust. The top rate continues to be subject to the 3.8% Medicare surcharge tax on net investment income. Unlike individuals, trusts and estates do not have a standard deduction and will most likely see an increase in tax liability despite the reduction in tax rates, as the rate changes are minimal. Trusts and estates will be eligible to receive a 20% deduction for qualified business income from passthrough entities.
The Act continues to permit a “step-up” in basis on assets inherited from a decedent. That means that when you die, your heirs’ cost basis in the assets you leave them are adjusted to the fair market value at date of death.
The Act did not change portability. “Portability” is the ability for a surviving spouse to use the unused gift and estate tax exemption amount of a previously deceased spouse. Portability does not apply to generation skipping transfer tax (GST).
Similar to individuals, the Act either eliminates or minimizes many deductions for trusts. The Act clearly states that the following items are not deductible for trusts and estates:
- Investment management fee and commissions
- Trustee/Executor fees related to investment management
- Personal casualty and theft loss not resulting from Presidentially-declared disasters
- Safe deposit box rental
- State income and property taxes over $10,000 not related to a trade or business or federally taxable investments
In prior years, miscellaneous expenses that would not have been incurred if the property was not held in trust or estate were not subject to the 2% floor, and would be fully deductible. These expenses continue to be allowed under the new tax act. They include trustee/executor and legal fees related to administration, tax preparation fees for Form 1041, state personal and real property taxes over $10,000 on federally taxable investments, and other administrative fees like appraisals, bank fees, court costs, etc. What is unclear is what is determined to be a federally taxable investment. Many trusts and estates hold assets for investment, so does this mean all the activities of a trust can be characterized as for the production of taxable income?
The new Act allows for a unique opportunity to take advantage of increased exemption amounts for gift, estate and generation-skipping transfer taxes starting on January 1, 2018. Have you consulted with your attorney and CPA about updating your estate plan and trust documents? Don’t wait too long to enjoy the sunrise.