Even though 2018 is over, many clients should still take the time to evaluate their current estate plans and look ahead to the next few years to evaluate how recent tax law changes have impacted the continued viability of existing strategies and opened the door for new opportunities.
While the estate tax-related provisions implemented by the 2017 tax reform legislation may seem simple on their face, the actual impact of the expanded transfer tax exemption can have far-reaching implications as to clients’ existing estate plans. With proper planning and advice, clients can enter the new year knowing that they are not leaving any tax savings opportunities on the table.
Lifetime Gifting Strategies
Under the 2017 tax reform legislation, the estate, gift and GST exemption amount was roughly doubled to $11.18 million per individual, and will be adjusted upward to $11.4 million for 2019. Despite this, the provision was made temporary, so that the exemption will revert to its pre-reform level of about $5.6 million in 2026. This has generated many questions as to how large lifetime gifts made before 2026 will be treated—in other words, whether the IRS will impose a “clawback” provision to tax gifts made in excess of a lower future exemption.
The IRS and Treasury answered these questions with proposed regulations to clarify that if individuals make large gifts between 2018 and 2025 in reliance on the enlarged exemption, they will not be punished if, after 2025, the exemption is allowed to revert to pre-reform levels.
In general, the transfer tax exemption is first applied to exempt lifetime gifts, and then applies to the individual’s remaining estate. Under the proposed regulations, an estate will be permitted to calculate the dollar value of exempted transfers using the higher of the amount that applied to gifts made during life, or the amount applicable as of the individual’s date of death.
Because of this new rule, wealthy clients should consider lifetime gifting strategies that take advantage of the currently high exemption. Many of these clients may wish to employ a strategy that makes large gifts over the eight-year period in which the enlarged transfer tax exemption will remain in effect.
Evaluating Stepped-Up Basis Rules
The expanded estate tax exemption has created a new complication for clients who have implemented estate plans designed to secure valuation discounts with respect to assets that could potentially be included in their gross estate. For example, clients often create family limited partnerships (FLPs) because of the potential valuation discounts that may be available.