Paul L. Caron

Wednesday, April 1, 2020

Miller & Maine: Wealth Transfer Tax Planning After The Tax Cuts and Jobs Act

John A. Miller (Idaho) & Jeffrey A. Maine (Maine), Wealth Transfer Tax Planning after the Tax Cuts and Jobs Act, 2020 BYU L. Rev. ___:

On December 17, 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). Among its many impacts, the TCJA increased the inflation adjusted estate tax basic exclusion amount to $10,000,000 on a temporary basis. This has dramatic implications for many existing and future estate plans, including a major crossover impact on income tax planning. In this article we explain the operation of the federal wealth transfer taxes (the estate tax, the gift tax and the generation skipping transfer tax) in the wake of the TCJA and of the newly issued regulations interpreting the TCJA changes. We also explain the basic tax planning techniques for wealth transmission. The overall design of this article is to bring the reader into the current wealth transfer tax planning picture while providing references to more detailed treatments of particular topics within this broad field.

The doubling of the basic exemption amount in the TCJA exacerbated an already significant anomaly in the overall tax system in the United States. This anomaly is the basis step-up rule of section 1014 of the income tax. Historically an important rationale for rule was that its chief beneficiaries were likely to pay one or more of the gratuitous transfer taxes on their wealth. Now we are in an era when only a tiny percentage of the population will owe those taxes. Thus, the capital appreciation of the assets of most of our wealthiest citizens is not subject to taxation unless the assets are sold during the taxpayer’s lifetime. Inter vivos sales may be avoidable through borrowing.378 This makes the income tax almost a voluntary tax for those persons. Of course, those citizens and the lawyers who represent them are not likely to complain. Moreover, estate planners are duty bound to assist those clients in planning their wealth transmission in the most tax efficient manner possible. We may decry a tax system that shifts nearly all the tax burden onto labor, while still being obliged to fully implement the advantages Congress has handed to our clients. Consequently, a lawyer who does estate planning should have a working knowledge of the federal estate, gift, income, and GST taxes. This article has provided a general overview of each wealth transfer tax and has described fundamental planning tools in light of the impact of these taxes.

The enactment of ATRA stabilized the law, especially with respect to the unified credit and the transfer tax rate structure. This made long range planning more possible than had been the case for many years. The permanent enactment of the unified credit portability rules laid the groundwork for the emergence of new planning strategies. The TCJA, on the other hand, introduced a significant degree of instability when it temporarily doubled the basic exemption amount. In doing so, it introduced an increased emphasis on income tax basis planning for many taxpayers. Many new planning techniques will undoubtedly be tried and tested in the coming years. But each will draw upon the fundamentals addressed above. Accordingly, one with a working knowledge of the transfer taxes and planning fundamentals is positioned to follow the trends and adopt the new techniques as they develop. A final comment is in order, however. One who merely dabbles in this area is likely to get burned. A preferred approach, accordingly, is for the knowledgeable practitioner to consult with a tax planning specialist as she develops the estate plan of a client with a high net worth.

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