November 6, 2017

Trust and Estate Planning Update

Fountain Pen on paper Tax & Business

The estate and gift tax laws are complex and always changing. When families and individuals plan for their future, they need to be aware of current changes so they can make informative decisions in regards to their estates.

In 2016, the U.S. Treasury and Internal Revenue Service issued proposed regulations that might have prevented minority interest and lack of marketability discounts for certain family-owned entities. Specifically, the proposed regulations provided new rules which would value transfers of interests in a closely held business without considering certain restrictions placed on those interests. These rules would have significantly reduced “lack of control and marketability” discounts for gift, estate, and generation-skipping (GST) tax purposes.

On April 21, 2017, President Trump issued an Executive Order instructing the Treasury to identify and reduce the regulatory burdens. On October 2, 2017, the U.S. Department of the Treasury issued a second report to the President stating that the “proposed regulations approach to the problem of artificial valuation discounts is unworkable.” As a result, Treasury and the IRS recommend that the “proposed regulations be withdrawn in their entirety.”

On September 27, 2017, the Trump Administration released a tax proposal titled the “Unified Framework for Fixing Our Broken Tax Code”. The proposal includes language to repeal the estate and generation-skipping transfer taxes. The proposal makes no mention of repealing or amending gift taxes. (Marcum’s tax professionals will keep you apprised of additional details with respect to estate tax changes as they become available).

On April 1, 2017, the amount of property that can pass free of New York estate tax was increased to $5,250,000. This was part of New York legislation passed in 2014. In 2019, when the law is completely phased in, the exemption amount will be equal to the federal exemption (as indexed for inflation). Estates valued in excess of the federal exemption will continue to pay New York estate taxes.

In 2017, each individual can transfer up to $5,490,000 during life without incurring a gift tax. This amount will increase to $5,600,000 in 2018 (as it is indexed for inflation). Upon death, each individual has the same exemption amount available, less what he or she used of the gift tax exemption during his or her lifetime. The annual gift tax exclusion for 2017 remains at $14,000 per person per calendar year, or $28,000 for married couples, if gift splitting is elected. This amount will increase to $15,000/$30,000 in 2018. Individuals may also make direct and unlimited payments of tuition or medical expenses directly to the applicable institution.

The Generation-Skipping Transfer (GST) tax applies to those transfers made by an individual to his or her grandchild or more remote descendants or to a trust for their benefit. The GST tax prevents a taxpayer from avoiding the transfer tax by bypassing the  generation immediately below (e.g., children). The rate of the GST tax is the highest applicable estate tax rate. The exemption amount applicable to each individual in 2017 is $5,490,000 and increase to $5,600,000 in 2018.

Under the portability provision of the Internal Revenue Code, a surviving spouse can use the unused portion of the deceased spouse’s estate tax exemption. The surviving spouse can use the unused portion for both gift and estate tax purposes, but not for GST tax purposes, and it does not apply to state death tax exemptions.

In order to preserve the unused estate tax exemption amount for the surviving spouse, an election must be made on an estate tax return for the deceased spouse.

The substantial gift tax exemption creates opportunities to make lifetime transfers to avoid estate taxes on post-transfer income and appreciation, and to transfer assets to grandchildren and future generations. Furthermore, the current low interest rate environment affords a number of effective techniques for transferring significant wealth to the next generation with minimal gift tax consequences. Some of the planning opportunities that work well in a low interest environment include the following:

  1. Loans to family members – An individual can make a low interest rate loan to another person (e.g., a child) who can invest the money and earn an amount greater than the interest he or she is required to pay on the loan.
  2. Grantor Retained Annuity Trusts (“GRATs”) – GRATs allow a donor to transfer assets with high appreciation potential out of his/her estate, provided certain conditions are met. The donor will fund the GRAT with highly appreciating assets and must receive an annuity payment from the trust each year. If the assets in the trust appreciate in excess of the interest rate prescribed by the Internal Revenue Service, that excess amount gets passed onto others (e.g., children) at the end of the trust term.
  3. Intentionally Defective Grantor Trusts – The sale of assets to an intentionally defective grantor trust allows the donor to transfer or sell appreciated assets to a trust in return for an installment note. The transaction allows the grantor to freeze the value of the estate at the value of the promissory note, without income and gift tax consequences. If the assets in the trust appreciate in value beyond the interest rate prescribed by the IRS, the excess is transferred free of transfer tax to the remainder beneficiaries of the trust (i.e., children and grandchildren).

It is unclear whether estate tax repeal will take place in the near future and what specific provisions of such legislation will be. If there is repeal, the estate tax can always be reinstated under tax laws passed by future administrations. Before making any substantial lifetime gifts, we recommend speaking with your Marcum tax advisor.

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