H.R.1 provides an opportunity for estate planning attorneys to capitalize on the new rules for tax exemptions. This article highlights some of the most important changes and provide strategies for maximizing your clients’ legacies.
H.R.1 – Tax Cuts and Jobs Act
On December 22, 2017, the president signed into law H.R.1, or The Tax Cuts and Jobs Act. Hailed as the greatest change in tax law in the last 30 years, H.R.1 has resounding impacts on estate planning, especially regarding changes in the gift and estate tax rules.
These changes offer estate planning attorneys an opportunity to revisit past clients’ estate plans, so updates can take advantage of the new tax rules as well as protect against any undesired results. Below is a summary of the changes that may affect your clients’ estate plans.
|Exemption Type||Previous tax rules||H.R.1|
|Estate Tax exemption||
$11.2 million (s)
$22.4 million (m)
Sunsets after Dec. 31, 2025
| Gift Tax Exemption
|| $14,000 for gifts (s)
$28,000 for gifts (m)
| $15,000 for gifts (s)
$30,000 for gifts (m)
|Estate & Gift Tax Rate||40%||Unchanged|
In addition to the estate and gift exemptions, the generation-skipping transfer tax increased to the same exemption amount under H.R.1.
If no further congressional action takes place, the increased estate tax exemption and GST taxes will sunset after December 31, 2025 and return to 2017 rates (adjusted for inflation). It’s important for estate planning attorneys to advise their clients to take advantage of these thresholds while they last.
Estate planning strategies under H.R.1
For estate planning attorneys, these changes provide an opportunity to serve current and past clients, and capitalize on updating estate plans. For instance, estate planning attorneys may want to consider reviewing all estate plans for current clients and letting clients know if they should consider updating their documents in order to take advantage of the new rules and why.
Depending on your individual client’s goals and current estate plans, here are some strategies that can progress your client’s current arrangements:
- make additional gifts to individuals and trusts
- decant non-GST exempt trusts to make them GST exempt
- sell appreciable assets to trusts
- establish and fund spousal lifetime access trusts
The goal of these strategies is to transfer assets, and their future appreciation, outside of the client’s taxable estate, thus minimizing the effect of transfer taxes at death.
Decanting GST and non-GST Trusts
Decanting is the process of transferring some, or all, of one trust’s assets into another updated and improved trust. By decanting assets from one large trust into smaller GST and/or non-GST trusts, your client can minimize future tax liability while also taking advantage of the increased GST exemption amount.
Clients with existing trusts that have not had a GST tax exemption allocated may want to consider making a late allocation now. Clients with existing GST tax exempt trusts may want to consider making distributions out of the non-exempt trusts to a GST tax exempt trust. Allocation to a trust of the increased GST exemption amount should allow the trust to be fully exempt from GST tax for the duration of its term – even after the exemption amount sunsets in 2026.
Drafting Help: Wealth Docx® document drafting software provides all the options you need to create decanting provisions, flexibility with trust protectors, powers of appointment, and other strategies to help your clients navigate H.R.1
Options for Charitable-minded clients
Usually the sale of an appreciable asset triggers paying capital gains tax. However, for the charitable client, they could decide to transfer the asset to an already established Charitable Remainder Trust (CRT). This would allow the client to both retain control of the property by serving as a trustee and obtain a hefty charitable income tax deduction.
When your client passes away, the charity inherits the asset and can sell it tax-free.
Drafting Help: The charitable planning module in Wealth Docx document drafting software assists in the creation of charitable remainder trusts--making you more efficient with your drafting and confident in what you provide your clients
Reassuring clients who worry about maintaining their current lifestyles
Your clients may be reluctant to take advantage of the new gift and estate tax rules, as gifting away assets may deplete an estate and inhibit your client’s ability to sustain their current and/or future lifestyle. For these clients, an estate planning attorney can suggest the creation of a Spousal Lifetime Access Trust (SLAT).
Through a SLAT, the donor spouse can make a gift to the beneficiary spouse without losing access to the gifted assets. The gift removes the assets from the donor spouse’s estate, thereby taking advantage of the new gift tax rules and diminishing future tax liability. The donor spouse will still have access to the funds, so long as donor and beneficiary remain married.
Drafting Help: The Lifetime QTIP Trust module in Wealth Docx provides all the options an attorney could need to take advantage of the tax savings provided by a SLAT.