Tax Update: The Reconciliation Act of 2017

The new tax act signed into law in December of 2017 will probably be known as “The Reconciliation Act of 2017” (the “Tax Act”) and may have an impact on your estate plan.

The good news is that the Tax Act has mostly positive consequences for estate, gift, and generation-skipping transfer (“GST”) taxes, including:

  • The individual exemptions for federal estate, gift, and GST taxes have been doubled from $5,000,000 (the exemption amount established in 2011) to $10,000,000, but only for the years 2018 through 2025. The exemptions are indexed for inflation.  Therefore, for 2018, the exemption amounts are $11,180,000 per individual.
  • Federal estate tax exemption “portability” was retained, so a surviving spouse can still use a deceased spouse’s unused federal exemption, provided that an estate tax return is filed and the portability election is made for the estate of the deceased spouse. Portability continues to have a number of limitations.  For example, the GST tax exemption is not portable and portability is currently not available for state estate tax purposes.
  • The federal gift, estate, and GST tax rates remain at 40%.
  • The federal annual gift tax exclusion was not affected and is $15,000 for 2018.

Importantly, the Act has no direct impact on state estate tax issues.  In the event you are a resident of Vermont or another state that has a separate estate tax with an exemption that is lower than the federal exemption, your estate may still be subject to a state estate tax, even though no federal estate tax may be due.  This is also the case for individuals who are not residents of such a state, but own real property in that state.

If you are a resident of Vermont or own real property in Vermont and the value of your estate exceeds the Vermont estate tax exemption of $2,750,000, we recommend that you contact us to re-visit your estate plan.

Effect of the Tax Act on Your Estate Planning Documents.

If Estate Tax Exemption Exceeds the Value of Your Estate.  We recommend that you review your current will and other estate planning documents to determine whether any changes are necessary as a result of the Tax Act.  For example, if the value of your estate is less than $11.18 million (or, under certain circumstances, $22.36 million for a married couple), you will not be subject to the federal estate tax and may no longer need some or all of the tax planning provisions and trust arrangements that may currently be part of your estate planning documents, at least until 2026 or earlier changes in these laws.

We also recommend you review your beneficiary designations for life insurance policies and retirement accounts and ownership of life insurance policies, including irrevocable life insurance trusts, to determine whether such designations are still appropriate.

Exemption Amount Planning.  If you have an estate plan designed so that at your death a gift equal to the then-applicable estate tax exemption amount is left to specific beneficiaries, you may wish to reconsider this structure in light of the fact that the estate tax exemption amount has doubled.  Estate plans that link the value of any specific gift to the federal exemption amount could result in an inadvertent reduction in the inheritance for your other beneficiaries, such as your spouse or other individual or charitable beneficiaries, thereby causing a financial hardship for such other beneficiaries or resulting in a distribution of your estate that is not in accordance with your intentions.  Accordingly, if you have this type of estate plan in place you should contact us to review your estate plan to determine whether revisions are appropriate.

Generation Skipping Planning.  If your estate plan includes GST tax planning, you should consider whether any revisions are warranted as a result of the increased GST exemption.

Equalization of Assets.  For couples to take full advantage of the increased estate and GST tax exemptions, one spouse may need to transfer assets to the other.  Please note that transfers between spouses who are not both U.S. citizens or between persons who are not married may result in adverse gift tax consequences.  We would be glad to advise you how to avoid these consequences.

Gifting Opportunities.  If you have already utilized the previous individual exemption amount for 2017 of $5.49 million, the increase of the gift tax exemption amount to $11.18 million may present new opportunities to pursue asset transfer techniques without the imposition of a gift tax.

In summary, we encourage you to review your current estate plan and to contact us if you determine that changes may be needed whether as a result of the Tax Act or other personal, financial or other changes that have occurred since you last updated your estate plan.  Alternatively, please let us know if you would like us to review your estate plan and contact you if changes should be considered.

We welcome the opportunity to talk with you about the implications of the Tax Act on your estate plan.  We also welcome the occasion to discuss other estate planning matters such as:

  • Planning for the disposition of your assets at your death;
  • Asset protection planning;
  • Planning for disability and incompetency;
  • Business succession planning;
  • Charitable giving;
  • Retirement planning;
  • Planning for children with disabilities;
  • Planning for spendthrift children;
  • Planning for clients with real estate in more than one state, including ownership, state income taxation, spousal rights, and probate issues (in addition to state estate tax);
  • Planning for clients who are U.S. citizens or residents who own property in other countries or may receive inheritances or gifts from family members who are not citizens or residents of the U. S.;
  • Planning to pay education expenses, including contributing to I.R.C. §529 plans; and
  • Identifying potential guardians for minor children.

Related Practice Areas

Trusts & Estates Tax Law