The Duffey Law Firm Blog

Tuesday, January 9, 2018

Trump Tax Reform Update #7

Just prior to Christmas, President Trump signed into law the most significant federal tax legislation in over thirty years.  It is important to note that the Tax and Jobs Act of 2017 does not repeal the federal estate tax.  However, the new law does provide a temporary opportunity for anyone who dies prior to the end of 2025.  As a result of this temporary opportunity, over the next few months, many taxpayers will be utilizing strategies to advance their estate planning goals by exploiting the new tax legislation’s generous terms.

Although the new legislation did not repeal the federal estate tax, it did almost double the federal estate and gift tax exemption amount for an individual from $5,490,000 to $11,200,000 (plus inflation adjustments) between 2018 and 2025.

The important thing to note is that after 2025 this window of opportunity will close.  In fact, from a political perspective, one can reasonably expect that a shift in the balance of political power in Washington could close the planning window of opportunity before 2025.

As long as this new tax law remains in effect, there are some powerful tax strategies which should be considered, such as:

DYNASTY TRUSTS.  These types of trusts shield assets from estate, gift and generation skipping transfer taxes and also provide for creditor protection including divorce claims.

GRANTOR RETAINED ANNUITY TRUSTS (GRATS).  These types of trusts were on the IRS target list to be eliminated under the prior administration, but they are still available under the current law and are potentially even more effective with the higher exemption amount.

SPOUSAL LIFETIME TRUSTS (SLATS).  These types of trusts protect assets from estate tax while allowing those assets to be used by the current generation before being passed to children and grandchildren.

CHARITABLE LEAD ANNUITY TRUSTS (CLATS).  These trusts provide for charitable income tax deductions and a tax efficient transfer of assets to future generations.

In addition to considering planning opportunities during this temporary period of favorable estate tax exemptions, one should consider the potential unanticipated consequences.

Because Congress has been moving the goal line on the exemption amount over the last ten years, almost all estate plans use formula language in wills and trusts.  This may lead to unintended consequences under the new tax law.  Consider this common example: (a) the trust provides that upon the death of the first to die spouse (the husband), the trust will be split into a marital trust for the surviving wife and a family trust for children; (b) at the time the trust was created, the exemption amount was $3.5M and the clients’ net worth was $5M; (c) therefore, at the time the trust was created, the marital trust would have been funded with $1.5M and the family trust would have been funded with the balance of $3.5M; (d)  under the current law, the surviving spouse’s (the wife’s) trust would not be funded and all the husband’s assets would go into the family trust.  In effect, the surviving spouse could be disinherited.

In many estate plans, the above result could have significant consequences and in some cases, could present disastrous results for the surviving spouse.

The bottom-line take away for all clients should be this:  The new tax law may provide significant benefits for your estate plan or it may provide for some significant challenges, but in all cases your estate plans should be reviewed and evaluated under the new law.





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