Since congressional ratification of the “Tax Cuts and Jobs Act” of 2017 (“TCJA”), federal Internal Revenue Service (“IRS”) guidelines effective tax year 2017 have proven to be a challenge for estate planners. Reform introduced to “simplify” the tax reporting process for entities, the Act modifies estate income tax guidelines; imposing a new set of rules for transfers and exemptions.
Guidelines to Tax-free Transfers
Specifying rule changes affecting both estate and gift tax exemptions, as well as generation skipping transfer exemptions, the new law increases the amount to $11,180,000 from $5,490,000 per person with inflationary adjustments assigned annually. Portability election rules continue, allowing a deceased spouse’s estate and gift tax exemption to carry over to a surviving spouse for use while living. Effective January 1, 2018 through December 31, 2025, the Act now makes it possible for a married couple to transfer a total of $22,360,000 without tax on gifts or estate transfers to family, heirs, or other beneficiaries.
Scheduled expiration of the TCJA January 1, 2026 presents some uncertainty, as the beneficiaries of estates and trusts will be responsible for adherence to retroactive exemption levels returning to $5,490,000 in tax-free income adjusted for inflation. The 8-year window of higher exemption offers high net wealth estates the opportunity to shelter assets across a range of estate and trust investment products, without the danger of taxation during the period.
The “Basis Adjustment” Rule
Rules to basis adjustment at death will also provide significant tax benefit. Assets inherited at time of death are subject to a flexible income tax basis adjustment once in the possession of a beneficiary. Basis adjustment is calculated according to fair market value at the date of the estate holder’s death. Taxable gain or loss is calculated from the sale of an inherited asset adjusted by a beneficiary’s just enrichment. As result, gains on appreciated assets accumulated prior to the estate holder’s death are protected from income taxes at time of sale. Consistent with existing IRS rules, there is no basis adjustment at death on gifted assets, 401(k), IRA, or other qualified retirement plan benefits transferred to an estate.
Tax-free Planning Solutions
Qualified Terminable Interest Property Trust (“QTIP”) offer significant tax planning flexibility. QTIP are a protective trust for the benefit of a surviving spouse. New York law does not permit an estate to perform QTIP election separate from federal QTIP election, except in limited circumstances. Federal IRS estate tax return reporting is due 9-months post the deceased spouse’s death but can be extended up to 15-months. A disclaimer is also an option, allowing a high net worth surviving spouse to disclaim and pass assets to a trust for the benefit of children or other beneficiaries with less income tax obligation.
Contact an Estate Law Attorney
With changes in federal estate, gift, and generation-skipping tax exemption guidelines, an estate planning attorney is essential to review forthcoming reporting obligations under law. An estate planning attorney can advise an estate or trust client of opportunities for tax-exemption in response to the new federal tax reforms. Ettinger Law Firm is a licensed attorney practice in New York specializing in estate planning and probate litigation. Contact Ettinger Law Firm for consultation about an estate planning tax law or probate law matter.
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