Under tax reform, the estate and gift tax lifetime exemption increased to $11.18 million in 2018, meaning high-net-worth clients can leave that much to heirs and pay no federal estate or gift tax, while a couple can leave $22.4 million. The exemption for estate, gift and generation-skipping transfer (GST) taxes increased from $5 million to $10 million.

Next year, the estate and gift tax exemption rises to $11.4 million per individual—another tax change widely seen as a boon to the wealthy. (The annual gift exclusion amount remains $15,000.)

Stephanie Sandle, a CPA/CFP and managing director at MAI Capital Management in Cleveland, has had many discussions with clients regarding what reform means for their estate. “The increase in exemption creates a great opportunity,” she said. “A common misconception relates to the difference between the different exemptions: There is a yearly exemption, a lifetime gift/estate tax exemption and a lifetime GST exemption.”

Also, “we’re often asked, ‘Should I gift that much?’” said Brenda Lowe, a CPA/PFS and director with John A. Knutson & Co. in Falcon Heights, Minn. “If you have it and you don’t need it, generally the answer is yes—getting assets and subsequent appreciation out of a high-net-worth client’s estate, the sooner the better.”

A life or tax change can easily alter the meaning of existing estate plan documents. “Older documents may have wording or a formula that may cause assets not to flow the way the decedent intended,” Lowe said. “If an estate was $10 million before the tax law change and the documents stated to fund the GST to the maximum and the remainder to go to the surviving spouse, the intention was to have approximately $5 million to each, the trust and the surviving spouse. After the new tax law and increased exemption for GST, all would go to the GST and nothing to the spouse.” 

The current gift and estate tax has a top tax rate of 40 percent, as does the generation-skipping tax. Last week the IRS also said that individuals taking advantage of the increased exclusion amounts from 2018 to 2025, when many reform measures are due to sunset, won’t be “adversely impacted” after 2025.

One common current misconception is that the exemption increase is permanent. “Those not prepared to transfer their wealth now would be wise to plan for the prior lower numbers as it’s not currently legislated to extend beyond 2025,” said Stein Olavsrud, CFP, executive vice president and portfolio manager at FBB Capital Partners in Bethesda, Md. Some clients also wonder whether the new exemption levels might be reduced should a Democrat win the presidency in 2020.

“Another common misconception is that this is the only tax their estate will be subject to,” he added. “Many states continue to have an estate or inheritance tax at levels significantly lower than the federal limitations.”

Wealthy clients are asking about new estate plan rules—and need advice.

Bruce Primeau, president of Summit Wealth Advocates in Prior Lake, Minn., tries to get clients to think about long-term tax minimization strategies, such as gifting low-cost basis shares of stock to charity and bunching charitable contributions to take advantage of the higher standard deduction; gifting low-cost basis shares to grandchildren to pay for college; or gifting a portion of an annual required minimum distribution directly to charity to reduce an estate and income tax bill. “Another tactic is for your client to transfer assets from a non-exempt trust to a GST,” Primeau added.

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