The New Estate Tax Law – Here Today, Gone Tomorrow

Increase in Exemption from Estate, Gift and Generation-Skipping Transfer Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. The Act implements a variety of significant tax reforms. Pertinent to estate, gift and generation-skipping transfer ("GST") taxes, the Act effectively doubles the exemption amount that an individual can give away or die owning without incurring gift or estate tax (the "unified credit") or GST tax. In 2017, an individual could give away during their lifetime, or die owning, $5.49 million of assets without incurring any gift, estate or GST tax. In 2018, it was scheduled to rise to $5,600,000. The Act instead almost doubles that exemption to $11,180,000 or $22,360,000 for a married couple. The unified credit and GST tax exemption will continue to increase each year based on an inflationary index. Upon an individual's death, assets owned by the deceased individual will still receive a "step-up" in basis, meaning that such assets will be deemed to have a new income tax basis equal to their fair market value at the time of the owner's death.

However, this "doubling" of the unified credit amount and generation-skipping tax exemption is not permanent. The Act provides that such amounts will revert back to pre-2018 numbers after December 31, 2025. This means that there is a limited period of time when clients can take advantage of the increased amounts that can pass free of estate, gift and generation-skipping tax.

Testamentary Dispositions: Use of Unified Credit Amount Definitions and How It Affects Your Proskauer Documents

Proskauer-drafted Wills and revocable trusts frequently include references to the unified credit amount which is an amount equal to the maximum amount that can pass free of federal estate tax. We typically direct that this amount should be distributed to a "bypass trust." Under a typical Proskauer plan for a husband and wife, a bypass trust is often held for the benefit of the surviving spouse and the couple's then living descendants. The remaining assets often are held in marital trusts for the benefit of the surviving spouse and, after the surviving spouse's death, in trust for the couple's children. Below is a chart showing the funding of a bypass trust in 2017 versus 2018 for a married couple where the first spouse to die had $25 million and his or her full exemption from gift and estate tax available.

Married Couple upon First Spouse's Death with $25,000,000 in Deceased Spouse's Estate

2017

2018

Bypass trust for spouse and issue

$5,490,000

$11,180,000

Marital residuary trusts

$19,510,000

$13,820,000

In some cases, the doubling of the unified credit may dramatically change the effect of your estate plan. For instance, if your estate plan provides for your current spouse and a child from a previous marriage, you may be funding a trust for one's benefit with an amount equal to the unified credit and providing that the remainder of your estate be held in trust for the benefit of the other beneficiary. You also may be making outright gifts to children or grandchildren in a total amount equal to the unified credit (or an amount that can pass free of both estate tax and GST tax). In both cases, it is important for you to review your estate plan and evaluate whether, given the larger unified credit amount and exemption from GST tax, your property is still being distributed in the proportions you desire. The increased unified credit and GST tax exemption may result in you giving more or less than you expected to certain beneficiaries.

If you have any questions, please communicate with your Proskauer attorney who can review your documents with you and advise you on how the increased unified credit and generation-skipping tax exemption may affect your existing estate plan.

Lifetime Giving: Increased Opportunity to Reduce or Eliminate Transfer Tax at Death

The increased exemption from gift, estate, and generation-skipping tax creates an opportunity for a limited period to make larger lifetime gifts and "lock-in" this increased exemption before it sunsets at the end of 2025. This can be accomplished through a variety of means, including:

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