|The legislation formerly known as the “Tax Cuts and Jobs Act” (the “Act”) has passed the House and Senate and is headed to the President for signature. Here are some of the ways the Act will impact estate planning.
The Act will increase the estate, gift and generation-skipping transfer (“GST”) tax exemptions to $10 million per person, adjusted for inflation. Beginning January 1, 2018, the exemptions will be $11.2 million per person and $22.4 million for a married couple. The tax rate remains unchanged at 40%, and the GST tax exemption is still not “portable” between spouses. These exemptions will expire at the end of 2025 and will return to current levels (adjusted for inflation) unless Congress acts to make the change permanent.
Here is our planning advice:
- Do not rely on these exemptions remaining permanent. If you have a taxable estate even at the increased exemption levels, consider making gifts in 2018 of your increased exemption amount.
- If you have an existing trust that is not fully GST exempt, consider making a late allocation of your increased GST tax exemption to such trust in 2018.
- If you are married and your estate plan utilizes your GST tax exemptions by creating “Descendants Trusts”, “Dynasty Trusts” or other trusts for the lifetimes of your children, grandchildren and more remote descendants, we should examine how your assets are titled to ensure that both spouses have assets up to the new exemption amounts in their own names.
- Although rare, some of our clients have estate plans that distribute the estate tax or GST tax exemption amount directly to children and/or grandchildren, thus skipping the spouse or in some cases, skipping children. If your plan includes this element, you should consider putting a cap on the amount passing pursuant to this provision, as you may not have intended for the full $11.2 million to skip your spouse or children.
Annual Exclusion from Gift Tax
The Act makes no changes to the annual exclusion from gift tax, but we note that it has increased for inflation to $15,000 for 2018. You can give any one person $15,000 without having to use any of your new $11.2 million gift tax exemption, and without having to file a gift tax return. If you are married, your spouse and you can give $30,000 to any one person in 2018, but a gift tax return will be required to report gift-splitting if the gift is made by only one spouse.
Under the Act, you can donate cash to public charities and operating foundations and receive a charitable contribution deduction for up to 60% of your adjusted gross income (“AGI”). The current limit is 50%. The limit for contributions of appreciated property such as stocks and real estate remains unchanged at 30% of AGI, and the limit for contributions to private foundations of 30% of AGI for cash and 20% of AGI for appreciated property also remain unchanged.
Because your income tax rate will likely be reduced in 2018, your charitable contributions may have more overall impact in 2017.
529 Plans May be Used for Elementary and Secondary Education
The Act amends Section 529 of the Code to allow certain amounts from 529 plans to be used for elementary and secondary education. Owners of 529 plans will be able to distribute up to $10,000 per child per year for enrollment or attendance at an elementary or secondary public, private or religious school. If a child has multiple 529 accounts created by parents and grandparents, the amount distributed to the child from all accounts in a calendar year cannot exceed this $10,000 threshold, so coordination among family members will be required.
Planning opportunity: Some clients hold back on funding 529 accounts to the maximum amount permitted under state law because of the prior limitations on what was considered a qualified educational expense. Now that the use of 529 accounts has been broadened by the Act, clients should consider making increased gifts to 529 accounts. If you make the election to use 5 years’ worth of annual exclusions, you can fund a 529 account in January 2018 with $75,000 per recipient (or $150,000 per recipient if you are married). This 5-year election must be made on a timely-filed gift tax return.
Pay Estimated State Income Taxes for 2017 before Year End and Pre-Pay Property Taxes
The Act limits the amount of property taxes and state and local income taxes you can deduct to $10,000 per year. As a result, you should pay all of your estimated state income tax for tax year 2017 before year-end. If you have a property tax bill due and payable, or if you can pre-pay any of your 2018 property taxes, you should also make these payments before year-end. Note, however, that if you are subject to the alternative minimum tax (“AMT”), these deductions may not be helpful to you.
Congress anticipated that some of us may try to prepay our 2018 state and local taxes, and it closed that loophole by disallowing deductions on your 2017 income tax returns for prepaid 2018 state and local taxes; however, property taxes are not mentioned and should be able to be pre-paid if the local jurisdiction allows it.
It is worth noting that the Act makes no changes to retirement accounts.
Please Contact Us
We hope to meet with you in 2018 to discuss ways to take advantage of the increased gift and GST tax exemptions. Please contact us to schedule an appointment.
Thank you to those of you who responded to our charity poll. Here are the results:
- 47% to Washington Area Women’s Foundation
- 28% to Tahirih Justice Center
- 25% to Lucky Dog Animal Rescue
Each organization will receive a meaningful check from us in the coming days.
Happy holidays, and best wishes for a prosperous, peaceful and happy New Year!
Your team at Birchstone Moore
The official name of the new law will be: “To Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”.