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As a general rule, it is advisable to revisit your estate plan every few years, or if some major change occurs in your personal circumstances or in applicable law. Recent historic changes to the tax law warrant revisiting your estate plan now.
As discussed in our prior client advisories{1}, the Tax Cuts and Jobs Act of 2017 (the “Act”) enacted the most significant changes to the U.S. tax code since 1986. In pertinent part, the Act temporarily doubled the federal estate, gift and generation-skipping transfer (“GST”) tax exemptions to unprecedented levels. This is meaningful because on the federal level, amounts gifted (during life or at death) in excess of the federal exemption amount are taxed at a rate of up to 40%.
The practical effect of the Act is that, in 2019, an individual can give, during life or at death, up to $11,400,000, and a married couple can give up to $22,800,000, to anyone (including grandchildren) without incurring any federal transfer tax. This opportunity, however, expires on December 31, 2025, when the exemption reverts to pre-Act levels of $5,000,000, indexed for inflation (note, however, that numerous Democratic presidential candidates propose to decrease the exemption and increase federal transfer tax rates prior to their scheduled expiration).
Depending on your current circumstances, it may be advisable to give assets to your children (or grandchildren) now so that those assets and the growth thereon are not subject to a federal estate (or GST) tax of 40% at your death. You could give almost any appreciating asset such as marketable securities, business interests or a vacation home, and forgive loans owed to you. Even if you do not wish to make any gifts now, it could make sense to simply allocate your temporarily inflated GST tax exemption amount to trusts you have created that could be subject to GST tax.
At the state level, there are certain quirks in the tax law that make reviewing your estate plan now even more compelling, including:
In light of these and other considerations, we recommend that you revisit your estate plan, especially if it includes formula clauses that tie the size of trusts or other bequests to the federal or state exemption amounts, to ensure it is consistent with your expectations and reflects the most efficient tax planning.
Please call us if you wish to do so.
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