Dear Clients and Friends,
The “Tax Cuts and Jobs Act” signed into law in December 2017 dramatically increased the federal estate, gift, and generation-skipping transfer tax exemptions. For 2021, the federal exemption amount is $11.7 million per person ($23.4 million per couple). This amount will increase annually based on an inflation adjustment. However, in 2026, when the individual tax cuts under the Act expire, the exemption will return to its pre-enactment level of $5 million, indexed for inflation.
The annual exclusion from gift tax remains at $15,000.
Portability (the ability of a surviving spouse to elect to use the unused exemption of a deceased spouse) and stepped-up basis (the increase in basis to date of death value) are unchanged under the new Act.
The Connecticut legislature also acted to increase the Connecticut estate and gift tax exemption. The exemption, which had increased under prior legislation to $2.6 million (from $2 million) for this calendar year, is now slated to increase to match the federal exemption by the year 2023. The slated increases are:
||Exemption Amount per SB 543
These changes may present both unintended consequences and planning opportunities. If, for example, a will or revocable trust references the federal or state exemption amount in making gifts to family members or to a trust for family members, with the balance to a spouse (or a trust for a spouse) (or vice versa), the increased exemptions may result in a greater amount passing to the family members and less to the spouse. In addition, references to the federal exemption without reference to the state estate tax exemption may result in a large Connecticut estate tax payable. “Formula-based” estate plans should be reviewed to ensure that no unintended results will occur and create unfairness or family rancor.
Estates that are well under the federal and state exemption amounts may benefit from simplification. An outright gift to a spouse or a gift to a qualifying trust for a spouse will qualify for an unlimited marital deduction. Portability can be elected to permit the surviving spouse to utilize the unused exemption of the deceased spouse, either for lifetime gifts to children or transfers on the survivor’s death. Assets may benefit from a step-up in basis on both spouses’ deaths. However, it should be kept in mind that there is no portability for generation-skipping transfer tax purposes, and Connecticut law does not recognize portability. Planning for state estate and gift taxes may still be necessary, even if assets are well below the federal exemption amounts. Prior to 2023, lower state exemption amounts will have to be considered when making gifts intended to utilize the federal exemption amount.
On the other hand, the increased exemption amounts may provide opportunities for increased giving, including charitable giving. Gifts can be structured so as to obtain a discount for gift tax purposes while retaining a right to income (with GRATs—Grantor Retained Income Trusts, or CRTs---Charitable Remainder Trusts, for example). Alternatively, gifts can be made to charities for a period of years, with the remainder passing to children at a reduced transfer tax cost, by using Charitable Lead Trusts. The increased standard deduction might encourage a lump-sum gift to charity or to a Donor Advised Fund at a local community foundation in a single tax year, in lieu of smaller annual gifts.
As with any significant changes to the tax laws, estate plans should be reviewed in light of these recent changes. Depending upon your specific situation and your personal objectives, the recent changes may result in unintended consequences, or present planning opportunities.
NOTE: This Notice is intended to be general and informative and is not intended as legal advice. The impact of any change in the estate and gift tax laws on your estate plan will depend on your specific situation, and you should seek advice from your estate planning lawyer or other tax professional to determine whether any changes should be made to your estate plan. Even if these changes will not impact you, your plan should be reviewed if at any time there is a change of circumstances (a named executor or beneficiary dies or becomes disabled, for example), you change your state of residence, or you hear of a change in the tax law that may affect your estate plan. Even if none of this occurs, you should review your estate plan every five years or so.