Estate and Gift Tax Changes in the Tax Cuts and Jobs Act

Another complication caused by the sunset provision relates to adjusted taxable gifts. Suppose a taxpayer makes a gift in 2018 for the full amount of the exclusion, $11.2 million, and dies in 2026 after the sunset, when the exclusion is back to $5 million, as adjusted for cost of living. The estate tax is calculated by adding the value of the decedent's taxable estate and the value of lifetime adjusted taxable gifts to determine the adjusted taxable estate.

So the taxpayer could have an estate tax due even though the gift was not taxable when made, and there were no assets left in the estate upon death. The Act includes a provision directing the IRS to issue regulations to address this issue, but is unclear how any such regulations will handle it.  Future changes in the law could also address the issue, or make it moot by eliminating the sunset provision or repealing the estate tax altogether.

Impact on Estate Planning

At first blush, it appears that the Act will make federal estate tax planning unnecessary for most Americans.  Before these changes, only 0.2% of decedents were subject to the estate tax, or two per 1,000. After the Act, those numbers will be about 0.08%, or eight per 10,000. For now, people with less than $22.4 million don't have to worry about the estate tax.

But it wasn't that long ago that people with estates under $1 million had to worry about the estate tax. So the number of wills and trusts that need to be reviewed and revised in light of the changes in the law is enormous. Many of these documents have formula clauses tied to the amount of the exclusion, which could now result in unintended estate dispositions. All of these estate plans should be reviewed in light of the Act.

And the federal estate tax is not the only reason for estate planning. There are state taxes that apply in many situations. There are family circumstances to consider in determining how much to leave beneficiaries and in what manner. Trusts are important to control the disposition of assets even if estate taxes are no longer a factor. For people with under $22.4 million of assets, which is most of them (99.92%), it is still important that their estates are distributed to the right beneficiaries, in the right way.

For people with substantial estates who will still be subject to estate tax with the higher exclusion amount, the planning opportunities are great. Even if they have fully utilized their exclusions with prior lifetime gifts, they now have another $5.6 million to utilize ($11.2 million if married). These gifts can be leveraged with strategies and techniques that estate planners have been using for years, such as grantor retained annuity trusts, sales to intentionally defective grantor trusts, irrevocable life insurance trusts, qualified personal residence trusts and interfamily loans, to name a few.

In 2013, we were told that the $5 million exclusion was permanent. So there is no reason to think the changes in the Act are any more permanent. In the future, we could see anything from full repeal, to the sunset taking effect, to a reduction in the exclusion. People in a position to take advantage of the increase in the exclusion would be well advised to act quickly while it is available, since there is no guarantee it will be here forever, or even for long.