The Tax Cuts and Jobs Act
November 7, 2017
On November 2, 2017 Representative Kevin Brady, chair of the House Ways and Means Committee, introduced the “Tax Cuts and Jobs Act” (the “Act”). In general, there are a few noteworthy observations regarding the Act. First, the bill has not even passed the House of Representatives yet. It was merely introduced. The Act, which affects a variety of taxpayers and income generating activities in various ways, will be the subject of intense lobbying efforts. Second, assuming the Act gets out of the House, it must still be voted on in the Senate, where the Republican majority is much smaller and more precarious than in the House.
Various articles have been written about the changes to the income tax laws proposed by the Act. This article, however, will focus on the changes made by the Act to the federal estate, gift, and generation skipping taxes.
Under the current law, the exemption amount for estate, gift, and generation skipping transfer taxes is determined by using $5,000,000 as the baseline and this amount is adjusted for inflation starting in 2010. As a result of the inflation adjustments, for 2017 each taxpayer can exempt $5,490,000 of transfers at death from the federal estate tax and the generation skipping transfer tax. The exemption amount is set to increase to $5,600,000 for 2018 under the current law. Each married couple, therefore, is able to shelter $11,200,000 from estate tax and generation skipping transfer tax next year under the current law.
The Act proposes to double the exemption amount and to eliminate the estate tax in 2024 and beyond. The Act provides that for 2024 and beyond the gift tax will exist, but the exemption amount will be determined as if the 2010 baseline was $10,000,000 per person.
The Act also (surprisingly) does not eliminate the “basis step up” that applies at death. By way of example, in the event of death a taxpayer’s built in gains for assets are eliminated. So, if you bought a stock for $10 and it is worth $100 at your death, the $90 capital gain is wiped out. The basis step historically was the “trade off” for applying the estate tax. At other times when there was no estate tax, the basis step up was eliminated or limited.
You should keep in mind several considerations with how the Act affects your planning:
- For many clients, the estate tax, gift tax, and generation skipping transfer taxes are not a concern. It is doubtful that the exemption amount for these taxes will be reduced any time in the near future.
- The bill may not become law, or, if it does, it may be very different from the Act. A few Republican senators have stated that the estate tax and generation skipping transfer tax should not be repealed, albeit with a much larger exemption amount. Other senators are leery of the increasing the budget deficit as well.
- If the Act becomes law and the provisions of the Act regarding the estate, gift, and generation skipping transfer taxes are not changed, it is important to remember that the “repeal” of these taxes does not occur until 2024. There are four election cycles between now and 2024, so this part of the Act could be repealed or amended.
- If the Act becomes law in its current form, clients should consider taking advantage of the increase in the gift tax exemption amount in case the estate tax is “reinstated” in the future.
- Clients should review their documents to confirm whether the documents provide for the funding of trusts using a formula based on the exemption amount available at death. Given the increase of the exemption amount, or its inapplicability after 2024, these formulas may no longer work as originally intended.
- Income tax planning by way of the cost basis step up will become more important. Clients may not want to make lifetime gifts of valuable, appreciated assets to obtain the basis step up at death. Clients may also want to consider removing appreciated assets from irrevocable trusts to obtain the basis step up. The benefits of the basis step up will need to be weighed against the application of the Pennsylvania inheritance tax and, for assets removed from a trust, the lack of creditor protection.
- A client with an irrevocable life insurance trust should review whether the Trust still makes sense or whether the amount of life insurance owned by the Trust is still necessary.
The attorneys in the Estate Planning Group of McNees Wallace & Nurick will be monitoring this legislation and developments related to it. If you have any questions about how the Act affects your planning, please feel free to contact a member of the Group.
© 2017 McNees Wallace & Nurick LLC
McNees Insights is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.