United States: Estate Planning Advisory

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:

  1. State Estate Taxes. In most states that have a state estate tax, the state exemption amount is tied to the considerably lower pre-Act federal amount. It is common for an estate plan drafted prior to the Act to create a trust funded with the full federal exemption amount. Due to the differential in the federal and applicable state exemption amounts, this could have unintended consequences. For example, in a NY decedent's estate, this could cause an unanticipated NY state estate tax of approximately $1,290,800!
  2. No State Portability. As under prior law, the Act provides that a surviving spouse can elect to use his or her last predeceased spouse's unused federal estate (but not GST) exemption amount. This is commonly referred to as "portability." No states other than MD and HI have portability with respect to their own estate tax exemption amounts. While it is very common for a spouse to simply leave everything to his or her surviving spouse, it is important to consider that the state estate tax exemption amount of the first spouse to die will be permanently lost. The practical consequence is that, to the extent that that amount is remaining at the surviving spouse's death, such amount - and all appreciation thereon since the first spouse's death - will be subject to state estate tax. With proper planning, this can easily be avoided.
  3. State Gift Tax. CT imposes its own gift tax with respect to gifts of real estate and tangible property situated in CT. No other state does this. A CT resident looking to use his or her enhanced federal gift tax amount this year should consider using assets located outside of CT or limiting the gift to the current CT estate tax exemption amount, which is $3,600,000. Alternatively, he or she could wait, as the CT exemption amount is set to increase gradually and equal the federal estate tax exemption amount on January 1, 2023.
  4. NY Estate Tax Cliff. NY law has what is known as the estate tax "cliff." If a NY decedent's taxable estate exceeds the NY estate tax exemption amount ($5,740,000 in 2019) by more than 5%, the decedent's entire taxable estate is subject to NY estate tax. For example, if a NY resident dies in 2019 with a NY taxable estate of $5,740,000, no NY estate tax is imposed, but, if the same taxable estate were increased to $6,027,000 (105% of the 2019 exemption amount), then the estate would incur a NY estate tax of approximately $514,040.

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.


1 Available at https://www.shearman.com/perspectives/2017/12/tax-cuts-and-jobs-act-passed and https://www.shearman.com/perspectives/2017/12/tax-reform-summary-for-family-offices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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