(Source: Forbes): Rob Clarfeld – To those who are fortunate enough to need serious estate planning, following various estate tax proposals over the years is not new; attempts at repeal of the estate tax have been discussed as part of proposed tax legislation for decades. With the passage of the Tax Cuts and Jobs Act (TCJA), the individual lifetime exemption from estate taxes doubles to $11.2 million, $22.4 million for married couples (and will further adjust for inflation).
What has been less of a focus for many, but as important, is that the lifetime gift tax exemption also has doubled to these same amounts. Now that the extremely tight window for year-end income tax planning has passed, my calendar is filling up with meetings with clients wanting to discuss possible revisions to their estate and gifting strategies. As a note of caution, these provisions will revert to 2017 law in ten years, unless extended or made permanent by a future Congress.
As is our approach to estate and gift planning meetings, we start with an update on changes within the family dynamics, including financial updates; changes within children’s families, careers and (perceived) maturity; further thoughts on the mix of outright bequests and the use of trusts; changes in philanthropic intention; and so on.
Pertaining to the estate aspects of TCJA, planning opportunities will center on magnitude and timing issues. The magnitudinal aspect is the stunning doubling of the estate and gift tax exemption — previous increases have been much more gradual. The timing aspects reflect the ability to utilize this exemption increase currently through immediate transfers, outright or through trusts, or by testamentary transfers.
There are major differences between passing assets via current gifts versus testamentary transfers upon death. These differences impact income taxes, basis, investments, and other financial considerations that have long been part of the planning process. Also, it is impossible to anticipate future extensions or changes to tax laws. And of course, a gift is a permanent transfer, while a testamentary bequest can be updated. A difficult choice when considering transfers to future generations, whether by gifts or bequests, is just because we can make these transfers, is it in the best interest of the family that we should make these transfers?
I will advise clients to carefully consider the impact of their gifts on the lives of the donees, especially when gifts are outright rather than through trusts. I’ve written on the need for parents to have “the money talk” with children, and find that even though there is near-universal agreement on the need, these talks often manage to find ways to be postponed. For many, writing a check is easier than having the series of deep discussions with kids as to the responsibilities that come with receiving wealth.
My advice is to proceed cautiously with gifting, and make time for the difficult discussions.
While the income tax changes forced a fire-drill in a very small window, considering the potential impact of the generous estate and gift tax changes can be done in a more deliberative and thoughtful way. Nonetheless, given the extraordinary magnitude of the change in the federal credit and the potential tax savings, it’s important to be mindful of the dynamic political landscape that can bring legislative changes much sooner than expected. Start the discussion with your advisor sooner rather than later.