The Tax Cuts and Jobs Act((In both the House and Senate versions, the bill was called the “Tax Cuts and Jobs Act.” Due to a last-minute change in response to a procedural issue, the official title was changed to “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”)) has been signed into law by President Trump, and the media is all abuzz with details on its far-reaching changes to federal income tax. Hopefully, those changes will bring the growth we need nationally because the retirement plan for many Californians is to leave the cesspool we’ve created.
But what are the likely estate planning ramifications of the new tax act?
For most families with significant wealth, there is no change in recommended foundational estate planning. The doubling of the exclusion (from $5mm plus inflation, to $10mm plus inflation) is only temporary and reverts to the current amount in 2026. There is no repeal of the estate tax, or of basis step-up/down on death under IRC 1014, no change in the rules on portability of deceased spousal unused exclusion amount, or to the general scheme of gift taxes and generation skipping transfer (GST) tax. As before, there is no portability of GST exemption, but you can still use a QTIP trust to accomplish pretty much the same thing.
So right now, foundational planning really only changes if you are likely to die within ten years AND your estate is valued between these amounts — currently for example, a single person with an estate between about $5.5mm and $11mm. For married couples, portability of deceased spousal unused exclusion amount brings the range to between $11mm and $22mm. So you have to be not only very old, or terminally ill (or at least extremely accident-prone), but also extremely wealthy, for there to be any major recommended shift in strategy or design for your basic, foundational estate plan as a result of this new tax act.
Moreover, unless things change radically, demographics and millennial voting habits indicate a likely return of power to Democrats at some point, perhaps even before 2026. Return of Democrats to power will probably mean a return of the estate tax, with a much lower exclusion amount. For now, even though it is still on the books, the estate tax is effectively repealed for all but a few thousand families, but throughout our history the estate tax has appeared, disappeared, and reappeared multiple times in various forms.
Prudent planning for most families will thus be flexible with regard to estate tax and also to capital gains tax (for married couples, often called “the new death tax”). One method which remains effective is the so-called Clayton election structure (described in the video below). Because it relies on a QTIP election, the Clayton method is vulnerable to estate tax repeal — still a possibility of course — so in that eventuality additional provisions such as powers of appointment and trust protector powers can provide the needed estate inclusion to eliminate capital gains tax.
Although the act does not change the need for flexibility in basic planning, the temporary doubling of the exclusion amount, and the fact that gift and estate tax are still unified, does provide some interesting opportunities for those able and willing to take advantage of the situation through various forms of advanced gift planning, assuming no clawback of the gifted amounts. For example: lifetime gifting outright or in simple irrevocable trusts for beneficiaries you care about, including GST exempt gifting to grandkids; non-reciprocal spousal lifetime access trusts (SLATs), which are basically lifetime QTIPs benefiting your spouse, an effective means of asset protection in California if done carefully under a partition agreement; domestic asset protection trusts (standard, or a hybrid version allowing you to be added as a trustee later).
Finally, circling back to the many income tax changes the act brings, it has been widely noted that the act’s limitation of the deduction for state and local taxes (SALT) makes the overall tax scheme relatively more expensive for Californians. This will increase interest in solutions like the Nevada Incomplete Non-Grantor (NING) Trust which can help avoid high California state income tax.