As the year is drawing to a close, we offer you some general advice regarding year-end planning.
Annual Exclusion Gifts
In 2018, the annual exclusion amount is $15,000 per donee, and a married couple may gift $30,000 per donee. The limitation on gifts to non-citizen spouses is $152,000 in 2018. In 2019, the annual gift exclusion will remain at $15,000 per donee, and $30,000 for a married couple per donee. The limitation on gifts to non-citizen spouses will increase to $155,000 in 2019.
Gifts in cash may be made up until 11:59 p.m. on December 31 and will still count as 2018 gifts. Gifts to non-charitable beneficiaries by check must be cashed by the donee before January 1, 2019.
Please remember that contributions to 529 college savings plans and transfers to insurance trusts and other inter vivos trusts that are subject to “Crummey” powers of withdrawal count toward a donor’s total gifts to the donee for that year. For example, if a single donor contributes $3,000 to a 529 plan for a child in 2018, the maximum remaining annual exclusion amount the donor may gift that child for 2018 will be $12,000. Gifts in excess of that amount will constitute taxable gifts and will reduce the donor’s lifetime exemption amount.
Direct payments for tuition, medical expenses and health insurance premiums in respect of a donee do not count toward the annual exclusion amount for that donee and do not reduce the donor’s lifetime exclusion amount.
Trustees of insurance trusts and other inter vivos trusts should make sure that Crummey notices are up to date. If a trust includes a Crummey power or withdrawal right, the Trustee should send notices to the Crummey power holders in a timely fashion. The Trustee should keep the Crummey notices with the trust records.
If you plan on making any year end gifts in excess of your annual exclusion amount, please contact us so that we may discuss these considerations in more detail.
Distributions from Retirement Accounts
If you are in pay status, you must take your minimum required distribution (MRD) before year end. You should check with the custodian to determine whether you must take a distribution before year end.
Periodic Document Review
It is important to review your estate planning documents. You should also review your documents periodically following changes in your personal circumstances, such as a change in marital status, the birth of a child, a change in the value of your assets or a change of domicile.
Wills and trust arrangements that contain a “formula bequest” tied to the maximum amount sheltered from federal estate tax may need to be reviewed in light of differences between the federal estate tax exemption and your state’s estate tax exemption. The doubling of the federal estate tax exemption may necessitate review of your will and trust arrangements if your assets are distributed according to tax formulas. For example, with the doubling of the estate tax exemption, a funding formula that bequeaths the maximum amount possible without incurring estate tax to a credit shelter trust or other third-party beneficiaries may result in significantly more of the estate, or even the entirety thereof, passing to the credit shelter trust or such beneficiaries and not to or for the benefit of the surviving spouse.
Life Insurance
If you have not already done so, consider whether it makes sense for your life insurance to be owned by an irrevocable life insurance trust. Such a trust could result in the death benefit of your life insurance escaping tax inclusion at your death.
Successor Owners of 529 Accounts
You should consider naming a successor owner for any 529 college savings accounts that you have created.
Successor Custodians
It is also important to name a successor custodian of Uniform Transfers to Minors Act and Uniform Gifts to Minors Act accounts. Remember that if you are the donor to a UTMA or UGMA account, you should not be the custodian. (If you are the donor and the custodian of your child’s UTMA account, the account will be includible in your taxable estate if you should die prior to the child’s attainment of the age of majority).
Estate, Gift and Generation-Skipping Transfer Taxes
The gift, estate and generation-skipping transfer tax exemption will increase from $11,180,000 for 2018 to $11,400,000 in 2019 per individual (or $22,800,000 for married couples). There is portability of a deceased spouse’s unused estate tax exemption (but not generation-skipping transfer tax exemption) to the surviving spouse.
The increased exemption is scheduled to sunset on December 31, 2025 and revert to what it would have been had the 2017 Tax Act not been enacted (or $5 million, indexed for inflation from 2010.) On November 20, 2018, the Treasury Department issued proposed regulations to reassure taxpayers that there would be no claw-back of the exemption should a taxpayer make gifts in excess of pre-2017 exemption amount and then die following sunset of the 2017 Tax Act. Nevertheless, taxpayers who do not fully utilize their increased exemptions through lifetime gifts may lose the additional exemptions following sunset of the 2017 Tax Act.
State Estate and Gift Taxes
New York’s exemption from estate tax is currently $5,250,000 and will increase to $5,740,000 in 2019. However, estates worth more than 105% of the New York exemption are subject to tax on the entire estate, without any benefit from the exemption. New York does not provide for portability of a deceased spouse’s unused estate tax exemption.
New York has no gift tax, but currently does include gifts made within 3 years of death in the estates of New York resident decedents who died prior to January 1, 2019. On January 1, 2019, the New York law that provided that gifts made within three years of date of death will be added back into the decedent’s estate will expire. Thus, decedents dying on or after January 1, 2019, will no longer be required to include the amounts of any gifts, regardless of the date of death, in their New York gross estate.
New Jersey’s estate tax was repealed for decedents dying on or after January 1, 2018. New Jersey does not have a gift tax, but it does impose an inheritance tax on transfers to collateral relatives, including siblings, nieces, nephews, and unrelated individuals.
In 2018, Connecticut’s estate and gift taxes apply to estates and aggregate gifts in excess of $2,600,000, with a top rate of 12%. The exemption will rise to $3,600,000 in 2019, with the exemption ultimately matching the federal exemption in 2020. Unlike New York, the Connecticut exemption after 2019 will be calculated using the federal exemptions in effect at the death of the decedent or at the time of the gift, so under its current laws, the Connecticut exemptions will jump substantially in 2020. Connecticut does not provide for portability of a deceased spouse’s unused estate tax exemption.
GRAT Annuity Payments
If you have a GRAT, annuity payments must be paid each year in accordance with the terms of the trust (or more often, if the trust provides).
Promissory Notes
Make sure interest payments under promissory notes are made on time and compounded if the promissory note provides.
Charitable Bunching
The increase in the standard deduction means that itemizing tax deductions each year might not make sense for donors because the sum of the taxpayer’s itemized deductions will not exceed the larger standardized deduction. The tax strategy of “bunching” allows a taxpayer to group together his or her deductions into a single year in order to surpass the itemization threshold. Different methods of bunching include making larger gifts in some years and not gifts in other years and using donor-advised funds to hold charitable funds for staggered deductions.
Identity Theft
An increasing number of individuals are victims of identity theft. Make sure you take steps to prevent identity theft. For example, do not share personal information, collect your mail every day or place your mail on hold if you are away, shred receipts, account statements and expired credit cards, and review your credit reports annually.
Restructuring of Family Offices
For information on structuring Family Offices in light of recent tax changes, we refer you to our December 13th bulletin on New Structures for Family Offices.
For additional information on recent tax developments with respect to private wealth planning, please contact Hume R. Steyer (212-574-1555), Scott M. Sambur (212-574-1445), David E. Stutzman (212-574-1219), Lori A. Sullivan (212-574-1406), Sara Veith (212-574-1257), or Samuel Thomas (212-574-1609).
