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How US tax reform may affect wealth planning

Adam von Poblitz

By Adam von Poblitz

Global Head of Cross Border Wealth Planning, Citi Private Bank

May 1, 2018Posted InWealth Advisory

The recent US tax reform has effectively doubled the amount of exemptions for the estate, gift, and generational skipping transfer tax, but this could be a ‘use it or lose it’ scenario for many who should assess their wealth plans now to benefit from this change.


The US exemption for the estate, gift, and generation skipping transfer tax were both scheduled to be approximately $5.6 million in 2018, due to an inflation adjustment. However, the recent legislation led to the biggest exemption increase in the history of US transfer tax, to $11.18 million for US citizens and residents. [Estates of NRA individuals are subject to US estate tax only on US situs assets, but with only a $60,000 exemption.]


Although this may be an excellent opportunity for many, it is crucial individuals of both high and modest levels of wealth review their estate plans to ensure they not only make the most of the changes, but also seek to prevent any unintended negative consequences.


It is important to note this is a lifetime exemption. This means that the cumulative amount an individual can give away during his or her life or upon death is $11.18 million. Therefore, if an individual gave away $5.18 million during his or her life, $6 million of that individual’s taxable estate upon death would be free of the estate tax, while anything above that amount would be subject to taxation. The generation skipping transfer tax exemption was also increased to $11.18 million. This applies if an individual leaves their estate to someone who is a grandchild or a more remote descendant.


It must be stressed, however, that these exemption amounts are temporary and set to expire after 2025. Although it is not likely this exemption will be altered in the next three years, a future congress or administration could change it thereafter.


As a result, for many US individuals the present situation could be a ‘use it or lose it’ opportunity. Wealthy individuals should consider using the $11.18 million exemption, especially married couples who are both US persons, and who thus have a combined $22.36 million in exemptions. Individuals may consider topping off existing trusts or even look at new structures as a way to utilize this.


This change is also important for individuals of lesser wealth. Although they may not want to fully utilize these exemptions, it is likely that the change may impact their estate plans.


This is because many estate plans, including wills and revocable trusts, reference tax exemption amounts, rather than dollar amounts. A fairly typical will wording could state: ‘Take the maximum amount that can be left free of the estate tax and put it in a credit shelter trust under my will for my children. Take the balance of my estate and put it in a marital trust for my spouse.’


Prior to these recent changes, this would have been a very efficient estate plan. If an individual had a net worth of $10 million, they would have placed $5.6 million – the maximum estate gift exemption – into the credit shelter trust, and the remaining $4.4 million into the marital trust, which would not have been subject to estate or gift tax.


Today, however, the same estate plan would give rise to a very different situation. If an individual has an estate of $10 million left in his or her will, but the maximum estate gift tax exemption is $11.8 million, the entire estate would be placed into the credit shelter trust, leaving nothing for the spouse, potentially causing a very upsetting and unforeseen estate result.


Therefore, all US individuals should use these changes as an opportunity to have discussions and decide what to do and how to best act in line with these changes to ensure that their estate plan is efficient and consistent with their wishes.