Federal Tax Reform – Historic Wealth Transfer Opportunities and Potential Unforeseen Pitfalls

March 2018

The recently enacted Tax Cuts and Jobs Act (the “Act”) is the most significant tax legislation to take effect in more than 30 years. Among other sweeping changes, the Act substantially increased the federal gift, estate and generation skipping transfer (“GST”) tax exemptions for tax years 2018 through 2025. For 2018, these exemption amounts are $11,180,000 per person (or $22,360,000 for a married couple), which is almost double the amount the exemption would have been under prior law and represents an increase of nearly 1,700% in the last 20 years.

Planning Opportunities

While federal exemption amounts are now at historically high levels, the time to take advantage of them is limited. Under the Act, the current increase will expire in eight years. After that, the exemptions are scheduled to return to 2017 amounts, indexed for inflation. Additionally, future legislation could supersede the Act and alter exemption amounts even earlier than 2026. Using the exemption amount of $11,180,000 (for 2018) rather than an exemption of $6,300,000 (a projected amount for after the increases sunset in 2026 based on an assumed annual inflation rate of 1.5%), results in almost $2,000,000 more passing to one’s beneficiaries instead of to the federal government.

Taking advantage of the increased exemption currently can have an even more powerful effect when state taxes are taken into account. Many states impose an estate tax with a significantly lower exemption amount than under the federal Act; however, very few states impose a gift tax. Making a current gift provides an opportunity to potentially “lock-in” the benefit of the increased federal exemption without using any limited state estate tax exemption. Gifts to a GST tax-exempt dynasty trust can leverage both the increased gift tax and GST tax exemption amounts and preserve significant family wealth for multiple generations.

There are several ways to make a current gift even if there isn’t a willingness to part with liquidity. Forgiving outstanding loans, gifting assets to a trust in which a spouse has an interest, or contributing an existing life insurance policy to a trust are just a few examples. Additionally, one could take advantage of the increased GST tax exemption without a current gift by allocating GST tax exemption to a non-GST tax-exempt trust created in a prior year. One would be well-advised to discuss these and additional techniques with their estate planning attorney to determine how best to leverage the favorable tax climate given one’s unique circumstances and the limited window of time available to act.

Unintended Effects on Existing Estate Plans

The increased exemptions provided by the Act may have unintended consequences regarding the distribution of an estate under existing estate planning documents. For example, tax driven formulas referencing the federal exemption amount now may underprovide for a surviving spouse, generate significant state estate tax liability, or result in other tax inefficiencies or unexpected dispositions of assets. The following chart illustrates the varying results that would occur if a New York resident with a gross estate of $15,000,000 died with a standard formula-based estate plan in December 2017 versus January 2018:

Dec. 2017

Jan. 2018

Credit Shelter Trust for spouse and descendants



Federal estate tax due



New York State estate tax due



Balance outright or in a marital trust for spouse



In situations involving blended families, the effect may be even more dramatic. Many times, the amount shown above as passing to a Credit Shelter Trust for the joint benefit of the spouse and descendants would instead pass solely to (or in trust for) the descendants. In this scenario, the result would be an estate plan skewed heavily in favor of the descendants which may not satisfy the spouse’s inheritance rights under state law. In light of these potential issues, existing estate planning documents should be reviewed to determine if adjustment is needed in light of the increased current federal exemption amounts.

To determine how you and your family can best take advantage of these historic wealth transfer opportunities and ensure that your estate plan accomplishes your objectives, please contact one of the senior members of our Trusts and Estates Department listed below.

Barbara J. Lawrence at +1 212 592 1692 or [email protected]
Katy H. Donlan at +1 212 592 1522 or [email protected]

© 2018 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.