Even before the COVID-19 pandemic upended everyone’s plans for the year, 2020 looked like a good time to revisit estate plans. A federal election on the horizon brings the potential to change some of the estate tax reforms made by the law commonly known as the Tax Cuts and Job Acts (TCJA).
The tax law known as the Tax Cuts and Jobs Act (the TCJA) impacts income tax planning for trusts and estates, at least until Dec. 31, 2025 when many of the provisions are scheduled to expire.
The IRS recently issued proposed regulations eliminating important valuation discounts commonly used in gift and estate tax planning. If finalized as currently proposed, these changes could increase an individual’s gift and estate tax liabilities by more than 60 percent. The Obama administration has attempted to limit valuation discounts on family-owned businesses for several years but has been unable to impose these restrictions through legislation. Now the Treasury Department has decided to achieve this goal through the regulatory route. Taxpayers have a small window of opportunity to take action before these regulations are finalized and become effective, which we anticipate to be sometime in 2017.
The use of valuation discounts is an important tool for estate planning. Discounts are commonly claimed for lack of control (minority interest discount) and lack of marketability. Applying such discounts in the context of family-controlled entities has long been a point of contention for the IRS. Unsuccessful in attempts to restrict the use of valuation discounts through legislative changes, the Treasury Department is contemplating new regulations to accomplish this goal.
In estate planning, the concept of "portability" of a deceased spouse's unused exclusion (DSUE) amount is relatively new. For decedents dying after December 31, 2010, if a first-to-die spouse has not fully used the estate tax exclusion, the DSUE amount can be transferred to the surviving spouse. This was originally passed as a two-year temporary provision (effective for 2011 and 2012) until it was made permanent in the American Taxpayer Relief Act of 2012.
Portability provides an alternative approach to fulfill a common estate planning goal of a married couple to take full advantage of both spouses' estate tax exclusions. Prior to portability, this was typically accomplished by funding a "bypass trust" (also known as a credit shelter trust) at the death of the first-to-die spouse with the exclusion amount and leaving the balance of the estate to qualify for the unlimited marital deduction. Now that portability is also an option, estate planners should determine which approach is better for a specific situation. Portability may be beneficial for certain estates and not others, but that is beyond the scope of this article.