Tax Bill-Estate and Gift Tax Changes

Taxpayers will have an $11,200,000 each for estate, gift tax, and generation-skipping tax exemption beginning January 1, 2018, which will rise with the Consumer Price Index each year thereafter. There were no other
significant changes made to the estate and gift tax rules. As a result, many affluent families will continue to engage in ongoing estate tax planning activities, and some will accelerate efforts to reduce their estates below the $11,200,000 exemption threshold because they now have the ability to completely avoid estate tax reporting requirements and paying estate tax on death, if certain actions are taken. Domestic asset protection trusts, dynasty trusts (structured as grantor trusts) and family LLC’s will continue to have great importance in advanced estate planning scenarios.

With respect to life insurance planning, and given that the estate tax exemption is scheduled to drop back down to the $5,600,000 plus inflation level in 2026 (and may be reduced further if the Democrats take control of the Congress and the Presidency), families may want to keep current life insurance arrangements intact. Alternatively, they can purchase inexpensive 10-year term life insurance or low initial premium second-to-die life insurance that could be converted into permanent coverage with much larger payments after conversion and higher overall expense if the estate tax becomes a problem because of its return in 2026 or before. In addition, future payments might be funded using split dollar loans instead of gifts to an irrevocable life insurance trust (ILIT), if the payors want to recover what is contributed, with interest, once they know that the estate tax is gone for good, or if they need the money.

Please let us know if you have any questions or need further clarification.

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