Is Your Estate in Order?


The first in a series of columns exploring the estate planning challenges and opportunities flowing from enactment of the Tax Cuts and Jobs Act (TCJA)
By Donald L. Sharpe, Emeritus Professor of Tax Law and Estate Planning, Fordham Law School

Everyone needs to review her or his existing estate plan in light of the challenges and opportunities flowing from changes in the estate, gift, and generation-skipping transfer (GST) taxes, as well as income tax, when TCJA was signed into law on December 22, 2017. Even if you never formalized an estate plan you have one by default (unless you plan to live as long as Methuselah, who some scholars claim died at the age of 969). TCJA doubled the unified estate/gift lifetime exemption, as well as the GST exemption. From $5 million per person indexed for inflation to $10 million indexed for inflation. In 2018 the exemption stands at $11,180,000, $22,360.000 for a married couple. With the exemption that high it is anticipated that only approximately 2,000 federal estate tax returns will need to be filed in 2018 across the entire country. The maximum tax rate on these taxes stands at 40%. In 2018 the annual gift tax exclusion per donee is $15,000, $30,000 for a married couple to each donee.

Subsequent columns will explore the challenges and opportunities flowing from these tax law changes enacted by TCJA, concentrating first on the changes in the estate, gift, and GST taxes, subsequently covering relevant changes in the income tax. Here are some basic issues to consider.

i. By its terms the new law sunsets on 12/31/2025, i.e., on 1/1/2026 the exemption reverts to $5 million indexed for inflation. Especially for individuals who have built formulas into their estate plan to comply with the doubling of the exemption, the formula needs to be reviewed and flexibility built into the plan to make sure the planned result takes place if and when the exemption reverts back to where it was on 12/21/2017.

ii. Surviving family members may not realize that TCJA requires an election to be made on the federal estate tax return of the first spouse to die, and timely filed with the IRS even if no estate tax is due, in order for a surviving spouse to utilize the decedent’s unused unified estate/gift tax lifetime exemption (called “portability”). You should review use of the portability provision in light of the factors outlined in (iii) below.

iii. There is an unlimited estate and gift tax marital deduction for bequests or gifts to a spouse (unless the spouse is a non-U.S. citizen). How much to transfer to a surviving spouse and the form of the transfer, whether outright or in trust and who is the trustee, depends on a number of factors, including the value of each spouse’s assets, each spouse’s remaining estate/gift tax exclusion amounts, how much control the decedent spouse wishes to give the surviving spouse, and the ability and willingness of the surviving spouse to manage assets. One option is to create a qualified terminable interest property trust (QTIP trust), which enables the decedent spouse to receive a marital deduction for trust assets, yet maintain control over how those assets are distributed when the surviving spouse dies. Basic requirements for a QTIP trust: the creating document must name a trustee, which can be a family member or a professional; the decedent’s executor must make an irrevocable QTIP election on the decedent spouse’s federal estate tax return; the income from the trust must be distributed to the surviving spouse at least annually; the trustee may, but is not required, to distribute principal to the surviving spouse, but no distributions of principal may be distributed to anyone else. The trust assets are included in the surviving spouse’s taxable estate. Use of a QTIP trust rather than an outright bequest to a surviving spouse is especially appropriate in the case of a second marriage to ensure that children of the decedent spouse receive trust assets when the surviving spouse dies.

iv. The generation skipping transfer tax (GSTT) is imposed when the transferor of property skips over her or his child as the recipient of a bequest or gift in favor of a member of a lower generation, e.g., a grandchild. The rationale for imposing the GSTT on the grandparent is to remedy the result that, for example, a $5 million transfer to a grandchild rather than to a child saves the child from having to use $5 million of her or his own exemption when the property is transferred to a member of a lower generation.

v. A spouse’s unused GST exemption, $11,180,000 in 2018, cannot be used by a surviving spouse, i.e., there is no portability. With the reversion of the exemption back to $5 million indexed for inflation on 1/1/26, currently built into TCJA, formulas built into wills and trust to calculate how each spouse’s GST exemption will be used need to be reviewed to see if they produce the intended result.

vi. A U.S. citizen or resident who lives outside the U.S. and Puerto Rico for more than one year must continue to report 100% of worldwide income on her or his U.S. individual  income tax return, but if also has a tax home in a foreign country may exclude foreign earned income up to $103,900 in 2018, a limited amount of foreign housing costs, and may benefit from the foreign tax credit.

vii. Individuals who are neither a U.S. citizen nor domiciled in the U.S. are subject to U.S. estate tax on certain types of assets situated in the U.S. known as “U.S. situs assets,” but with an exemption of only $60,000 unless increased by an estate tax treaty. U.S. situs assets include U.S. real estate, tangible personal property physically in the U.S., publicly traded securities of U.S. companies, life insurance with a cash value, but not cash deposits with U.S. banks (not an exhaustive list). Such individuals are subject to U.S. gift tax on transfers of tangible personal property, including cash deposits with U.S. banks, and real property located in the U.S., but not even the $60,000 exemption applies. The $15,000 per donee annual gift tax exclusion does apply, however, but spouses cannot split the gift between them if one spouse is not a U.S. citizen or domiciliary.

viii. If you become a “covered expatriate,”i.e., you renounced your U.S. citizenship or long- term residency status (the terms U.S. citizen, long-term resident, and “renounce” as defined by IRC section 877) the tax consequences are quite different. You will be deemed to have sold your assets (“assets” again as defined) for fair market value on the day before you expatriated, the gain on the deemed sale being subject to U.S. income tax, with the exception of a gain exclusion amount indexed for inflation, $713,000 in 2018. And if you as a “covered expatriate” transfer property not located in the U.S. as a gift to a family member still living here, you may be surprised to learn that the recipient family member is required to report the gift on a U.S. gift tax return and pay the gift tax using the usual annual gift tax exclusion and lifetime gift tax exemption amounts.

ix. There are other estate planning issues you need to review, including your Will and potential probate estate; life insurance no longer needed to pay estate tax; retirement plans and IRAs; health care proxies; retaining low basis assets in your taxable estate so that the asset receives a step-up in income tax basis to fair market value on distribution to a beneficiary; and exploring the confusion surrounding the new deduction for pass through business under IRC section 199A.

x. As 2019 gets under way you may be in a position as an alumnus of Fordham law School to give back by making an income tax deductible charitable contribution to the School within the current year. Click here to learn more about Giving to Fordham Law School. Without getting into the current percentage limitations, charitable gifts of cash or property are always welcome to support a number of School functions, including student and faculty recruitment, endowed faculty chairs, career planning, scholarly research, the outstanding services provided to faculty and students by The Maloney Library, student organizations, clinical education, the operational costs of the new law school building, and various centers and institutes. If, on the other hand, you determine that you will need to live on future income generated by an asset you now own, here is a suggestion. Create a Charitable Remainder Annuity Trust (CRAT) by transferring e.g., stock that has appreciated in value into an irrevocable trust. The trustee sells the stock and pays no capital gains tax, then reinvests the sales proceeds into income producing assets, pays you or your designated beneficiary a fixed payment (between 5% and 50% of trust assets) at least annually for a term of years (no more than 20) or for the balance of your life or beneficiary’s life, with the assets in the trust then passing to Fordham Law School without being included in your taxable estate. You can take an income tax charitable deduction on the creation of the trust for the value of the remainder going to the Law School. Here is another suggestion: if you are 70 ½ years of age or over and you are required to take a minimum distribution from an IRA you don’t need to live on, instruct the IRA administrator to distribute up to $100,000 directly from the IRA to Fordham Law School. The distribution counts towards the MRD and is not included in your taxable income. Finally, you may wish to contribute assets to an irrevocable Charitable Lead Annuity trust (CLAT) that pays Fordham Law School a guaranteed payment for a fixed term (which can be the life or lives of one or more people), with the remainder passing to you as donor or other noncharitable beneficiaries. The trust can claim a charitable deduction for amounts distributed to Fordham.

This column is intended to make information available to its readers and does not constitute legal or tax advice. Please consult IRS Circular 230 Notice, regulations governing practice before the IRS with respect to not using a blog as written tax advice to support a taxpayer’s dispute with the IRS. If you wish to discuss an estate planning issue with Professor Sharpe please send him an email at


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