Tax Cuts and Jobs Act Estate Planning Strategies
posted Aug 6, 2018 by Dave Desmarais, CPA/PFS, MST, MBA, AEP® in the Global Tax Blog
From an estate planning perspective, the Tax Cuts and Jobs Act provides wealthy individuals with certain beneficial (but fleeting) estate planning opportunities. Learn more…
Tax-Free Transfer Opportunities
Due to the TCJA, an $11 million exemption from the estate tax— and its counterpart for lifetime transfers, the gift tax — is available to each taxpayer. (Any exemption used during life reduces the exemption available at death.) Federal estate tax will be due at your death only if your taxable estate exceeds your available exemption.
Fortunately, there are several types of gifts you can make tax-free without using up any of your lifetime exemption, thus leaving you with more exemption available for transfers at death.
- For example, as you might expect, donations to qualified charities aren’t subject to gift taxes (or estate taxes). And if you’re married and your spouse is a U.S. citizen, you can also make unlimited transfers to him or her (gifts or bequests) tax-free.
- You might be more surprised to learn that if you pay someone’s health care or tuition expenses, the payment isn’t subject to gift tax. You just need to make the payment directly to the provider. This can be a powerful tax-saving tool if, for example, you’d already been planning to help fund your grandchildren’s college education.
- Last but not least, there’s the annual gift tax exclusion. Gifts up to the annual exclusion amount ($15,000 per recipient for 2018) are generally tax-free. This is on a per recipient basis.
If your estate is large enough that you think you may need to worry about federal estate tax, here’s how to roughly estimate your exposure:
- Estimate the value of your assets.
- Subtract any debts and any planned bequests to charity.
- If you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. This subtotal is the estimated value of your taxable estate.
- Apply the exemption amount you expect to have available at death. Don’t forget:
- Any gift tax exemption amount you use during your life must be subtracted.
- If your spouse predeceases you, his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).
- The exemption currently is annually indexed for inflation, so if the estate tax is still in place, the exemption will likely be higher.
If your taxable estate exceeds your available estate tax exemption, the excess will be subject to federal estate tax. In that case, a repeal of the estate tax could benefit you. But repeal is still uncertain, so it’s important to consider steps that would potentially reduce your estate tax liability.
Squeezing and Freezing Strategies
Some of the most valuable strategies for reducing potential estate tax liability involve “squeezing” and “freezing” assets — in other words, discounting assets in various ways and locking in lower asset values. They also can allow you to hold on to a degree of control over the assets. In some cases, you can even receive an income stream from them. Here are some options:
- Grantor Retained Annuity Trust (GRAT). The basic idea of a GRAT? You transfer assets to an irrevocable trust and name your children or other heirs as beneficiaries.
- Intentionally Defective Grantor Trust (IDGT). An IDGT is used to freeze certain assets of an individual for estate tax purposes, not income tax purposes.
- Spousal Lifetime Access Trust (SLAT). This is another irrevocable trust in which you name your spouse as well as your children or other heirs as beneficiaries and can apply your lifetime gift tax exemption to contributions to the trust.
- Family Limited Partnership (FLP). This allows you to transfer businesses or investment interests to your children and removes the value of those interests from your taxable estate while retaining management control.
Choosing the Optimal Strategy
Please contact us to discuss your specific situation—There are details to consider before implementing any of the above strategies.