The newly proposed tax laws would impact estate law (and therefore estate planning) in the following ways:
Basis Step-Up Stays
The proposed tax bill currently keeps the “basis step-up” rule. Under current law (and the proposed tax law), the tax basis of an asset held until death is readjusted to fair market value, permitting heirs to sell the asset without realizing any taxable gains.
New Gift Tax Exemption
The proposed tax bill increases the gift tax exemption to $10 million per person, indexed for inflation (so that in 2018, the gift tax exemption, per person, would be approximately $11 million).
New Estate and Generation-Skipping Transfer Tax (“GST”) Exemption
The proposed tax bill increases the estate and GST tax exemptions to $10 million per person, indexed for inflation (so that in 2018, the estate and GST tax exemptions, per person, would be approximately $11 million).
Reduced Marginal Estate, GST and Gift Tax Rate
The proposed tax bill reduces the top tax rate (for estate, GST and gift tax purposes) to 35% in 2024
What does this mean?
With increased exemptions for estate and generation-skipping estate taxes, and with a complete basis step-up at death, there is little tax reason to transfer highly appreciated assets during life.
However, parents will be able to make gifts to their children for many purposes, without being concerned about any estate or gift taxes.
Moreover, many individuals may want to consider making gifts up to the increased gift tax exemption amount to flexible trusts that will provide creditor protection for families. Flexible trusts can be drafted to provide that low basis assets may be swapped with higher basis assets in the future, yet the value will be excluded from their estate in case the estate tax is ever reinstated.
Finally, many current irrevocable trusts, created for many reasons, such as to avoid future estate taxes when the second spouse dies, should be reviewed, analyzed and possibly modified in court, if the new tax law becomes effective. Many states, including Maryland, D.C. and Virginia, allow individuals to ask a Court to modify or reform an irrevocable trust, including to address unforeseen tax law changes. Because of the proposed changes to the estate, GST and gift tax, individuals with estates less than $11 million (or $22 million, if married), may want to modify irrevocable trusts in order to have the assets in the irrevocable trust be included in their taxable estate when they die, in order for these assets to receive a new tax basis at death.