2017 Tax Cuts and Jobs Act: Wealth transfer implications

On December 20, 2017, the United States House of Representatives voted along party lines to approve the latest version of the Tax Cuts and Jobs Act, giving final Congressional approval to the Act, and clearing the way for President Trump to sign the Act into law. The Act makes sweeping changes to the Internal Revenue Code, including to the provisions related to estate, gift and generation-skipping transfer (“GST”) taxes. Most significantly, the Act increases the federal estate, gift and GST tax exemption available to individuals from its current $5 million to $10 million (adjusted for inflation). In practical terms, under current law, US persons can make lifetime or testamentary gifts of $5.49 million (or $5.6 million in 2018) without paying any federal gift, estate or GST tax. Under the Act, the 2018 exemption is adjusted to $11.2 million per person or $22.4 million per couple. The impact of this is to exclude significantly more people from the application of federal gift, estate and GST taxes.

Notably, however, the increased exemptions are scheduled to sunset on December 31, 2025, at which time the exemptions in effect today will be reinstated. Thus, the Act presents an opportunity for wealthy individuals to utilize additional exemption amounts starting in 2018. In principal, an individual who has made prior gifts and utilized all of his $5.49 million exemption as of 2017 can, in 2018, make additional gifts of $5.7 million outright or to family trusts free of federal gift, estate and GST tax.  

Many individuals will also need to review their current estate plans to ensure that formula language used to create credit shelter trusts and GST tax-exempt trusts at death continue to meet their needs, that the “right” amount of assets are flowing into those trusts, and that assets are available outside of the formulas to fund outright gifts or bequests.

Other than the increased exemptions, current law concerning federal gift, estate and GST tax remains essentially unchanged under the Act. Individuals may continue to make annual exclusion gifts, the values of which will increase to $15,000 per person (or $30,000 per couple, if “gift-splitting”) in 2018. Similarly, transfers directly to educational institutions to pay for tuition will not constitute gift-taxable transfers. The basis step-up provision under IRC Section 1012 (which allows assets includible in the estate of a decedent to receive a basis equal to the fair market value of the asset on the decedent’s date of death) also remains unchanged under the Act.  

Finally, in addition to slashing the top corporate tax rate to 21%, effective in 2018, the Act includes a new 20% deduction for certain types of qualified pass-through business income, however, this deduction (unlike the reduction in corporate tax rates) will also expire on December 31, 2025. Pass-through entities include S-corporations, LLCs, LLPs, partnerships and sole proprietorships, as well as trusts and estates that own interests in these entities. Entities, however, with taxable income in excess of threshold amounts ($207,500 for individuals and $415,000 for married couples) that are “service businesses” such as law and accounting firms, and financial consulting firms, are not eligible for the deduction. There will be much more to discuss in 2018 as we assimilate these broad changes and we will continue to share details and planning strategies in the coming months.