On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the Act), ushering in the most significant tax reform legislation since 1986. One of the most impactful changes made as part of the Act was to the estate and gift tax law.

Throughout the 2016 presidential campaign and the tax reform legislation process that followed, the president declared his position for total estate tax repeal. Under the Act, estate and gift taxes remained, but those exemptions have been raised to $11.2 million for individuals and $22.4 million for married couples. However, those exemptions expire in 2026, when they will revert to today’s levels. Those levels are indexed again, but this time to the “chained” CPI index, which is lower. Calculations performed with this new index predict $6.3 million/$12.6 million exemptions in 2027. Read our blog on the state of the estate tax for more analysis on this important subject.

As part of the Act, the federal estate tax rate remains at 40 percent above the exemption. The gift tax stays at 40 percent.

The implications of all this are multifaceted and impact wealth and estate tax planning to varying degrees. We offer some key takeaways below as they pertain to personal wealth management, corporate and individual planning, life insurance planning and pension planning strategies.

Planning Takeaways

• Heirs/designees of individuals who die within the next eight years will be subject to lower federal estate taxes.
• State estate taxes will still apply and remain at considerable levels in a number of states.
• Coupled with the $10,000 deduction limitation on real estate taxes and state income taxes, there may be a further physical migration to lower-tax states.
• If the House and/or Senate turns Democrat following the November 2018 midterm elections, these changes to tax law may be reversed, along with other presidential directives. However, this would be subject to a possible presidential veto that would require a two-thirds congressional majority to overrule.
• The gifting exemption is also raised to the estate tax exemption limits cited above (i.e., $11.2 million for individuals and $22.4 million for married couples). This increased limit provides a planning opportunity for affluent individuals to make additional gifts to children and trusts. This is a “use it or lose it” provision; waiting until 2027 would allow the gifting amounts to revert to the lower $6.3 million/$12.6 million limits. There does not appear to be any “claw back” provisions in the new law.
• Gifting opportunities can also be coupled with existing techniques (e.g., discounting, GRATs, Intentionally Defective Trusts, CLATs) that were left untouched in the new tax law.  These can provide even more leverage for gifting. Generation Skipping Trusts (GST) will be utilized even more in conjunction with the increased gifting limits.
• The changes to the corporate and individual tax rates and provisions are substantial. CPAs are still trying to figure out the implications and determine which planning techniques are the proper ones to implement. Unfortunately, the “postcard” tax return will not happen for high-income individuals, but the returns will certainly be even more dense and convoluted than the current process.

Corporate and Individual Planning Takeaways

• The changes to the corporate and individual tax rates and provisions are substantial. CPAs are still trying to figure out the implications and determine which planning techniques are the proper ones to implement. Unfortunately, the “postcard” tax return will not happen for high-income individuals, but the returns will certainly be even more dense and convoluted than the current process.
• Eight-year Grantor-Retained Annuity Trusts (GRATs), designed to “roll out” before the new federal estate tax threshold expires, could be very effective in moving wealth to the next generation, with less risk of federal estate taxes in the event of a death during the GRAT term.
• There will be a swift return to “loan regime” split dollar insurance programs for all corporations, since corporations will be more lightly taxed than they currently are and will benefit from substantially lower rates than individual tax rates. This provides a big planning opportunity for corporations via split dollar, since the employer is “lending” money to the employee, and the low interest or economic benefit is the imputed cost.
• There will be a reduction in existing and newly implemented “executive bonus plans.” The deduction to the corporation is worth less and the bonus will be taxed more to the employee than in the past. Many executive bonus plans will morph into split dollar or deferred compensation plans.
• No longer will “pass-throughs” have to shy from split dollar plans; there is still tax leverage to be gained. Trusts can also leverage the new pass-through taxation.
• Corporate tax rates will be even lower than the 21 percent stated level. Some studies postulate that the effective rate will be closer to 10 percent, due to the fact that many corporate tax deductions (e.g., interest expense, depreciation, retirement plans, R&D expenses, equipment expenses, one year write-offs) were left intact.

Life Insurance Planning Takeaways

Life insurance will play a larger role in the individual’s overall financial portfolio due to tax saving, asset protection, income withdrawal ability and reduced Alternative Minimum Tax (AMT) exposure. Life insurance as an “asset” class will be a more common term utilized by financial advisors.

Additionally, acquiring life insurance within the corporate structure will exhibit new advantages while still maintaining the existing ones. Specifically:

• Accumulating monies within the insurance policy cash value will be even more tax advantageous.
• With corporations no longer subject to AMT, the extra tax drag on death benefits applicable to corporate-owned policies will disappear. Think key person, deferred comp, buy/sell coverage, all corporate owned policies, etc.
• Deferred compensation in nonqualified plans will experience a resurgence. In the original House and Senate tax reform drafts, nonqualified deferred compensations would have been eliminated. Even existing plans would have gone away. Heavy lobbying occurred for that provision to be removed from the bills.

The bottom line is that life insurance expense will be less costly under the lower corporate brackets than previously.

Pension Planning Takeaways

• It’s likely that more Roth IRA conversions will occur, due to lower individual rates.
• If charitable contributions are discovered to have an “elastic” economic demand component correlated with the value of tax deductions, you may see a trend of lower charitable contributions.
• Employees with flexibility to change to a 1099 status, may incorporate to take advantage of the new tax brackets and pension opportunities. However, they may be putting their health care and qualified benefits at risk by doing so, and would have to acquire their own.

All takeaways in this article represent educated opinions, and we certainly welcome any comments you wish to share. We will continue to closely monitor the landscape and keep you updated as developments occur. In light of the Act and its many ramifications, all life insurance policies, corporate and individual, should be reviewed along with their corresponding agreements and trusts. This is the work we at American Business specialize in, and we encourage you to contact us for assistance.