9 Ways New Tax Law Could Affect Clients’ Estate Plans

Of course, possible repeal of the tax law in a subsequent Congress is always on the table, Nixon Peabody warns in its private client alert, so taxpayers should stay informed.

But as the law stands now, high-net-worth clients and their advisors should pay close attention to the following areas:

• Estate planning.  Trusts can provide protection from creditors and divorcing spouses and provide control over how beneficiaries inherit wealth (particularly important for families with spendthrift, mental illness and addiction considerations) and help preserve wealth for generations. Many states have separate estate tax regimes; people who reside or own property in those states should continue to plan around those taxes.
• Portability election. The portability election, which allows a surviving spouse to use the deceased spouse’s unused federal estate and gift tax exemption, is unchanged. This means a married couple can use the full $20 million exemption (indexed for inflation).
• Estate tax exposure. For very high net-worth clients who will still have federal estate tax exposure and clients who live or own property in states with their own estate tax, the traditional wealth transfer strategies will still be useful. Clients will want to review their federal estate tax exposure under the new rules.
• Basis step-up at death. The step-up in tax cost, by which a decedent’s assets obtain a step-up in their tax cost to their fair market value at the date of death, is not changed. With the step-up in tax cost retained and a much higher federal estate tax exemption, income tax planning becomes a much more important element in estate planning and estate administration.
• Annual exclusion gifts. Individuals will want to consider whether making gifts during their lifetimes is the right tax planning strategy for them. The gift tax annual exclusion amount is $15,000. The gift tax annual exclusion amount remains subject to an inflation adjustment.
• Basis carryover for gifts. Gifts made during the donor’s lifetime will continue to pass to the donee with the donor’s tax cost. It may make sense for a donor to hold off making gifts of assets that have significant unrealized gain until the donor’s death in order to give the beneficiary the asset and the step-up in tax cost. Of course, there are many other considerations in gift tax planning, and individuals should consult with their estate planning attorney before embarking on or changing a gift program.
• GRATs. Short-term grantor-retained annuity trusts (GRATs) or qualified personal residence trusts (QPRTs) whose terms end before the Act’s sunset provisions will still be an effective planning technique for very high net-worth clients.
• Irrevocable trusts. Existing irrevocable trusts that hold low-basis assets should be reviewed to determine whether there is benefit to (and the possibility of) rendering them subject to estate tax in the estate of a beneficiary who might die before the increased exemptions sunset. The planning opportunity is to obtain the step-up in tax cost (thus reducing capital gains tax for the next set of beneficiaries) without payment of estate tax.
• Closely held businesses: With the exemption amounts scheduled to revert back to $5 million (indexed for inflation) in 2026, planning is still critical for families with large closely held businesses and a net worth significantly greater than the exemption amounts, Nixon Peabody said. “If, as 2026 approaches, reversion to current law appears likely, clients should consult with their advisors to determine whether an aggressive gifting plan makes sense.”

— Related on ThinkAdvisor:

• 10 Weird State Taxes and Exemptions
• New Tax Law Could Change How Clients Invest: Andy Friedman
• Beware the Chained CPI Link in the New Tax Law