Although hard to believe, 2018 is almost behind us. With the end of the year approaching fast, now is the perfect time to review your estate planning and any important year-end opportunities to minimize your tax obligations. The Tax Cuts and Jobs Act (“TCJA”) was signed into law just one year ago on December 22, 2017, and you may have some new planning opportunities that were not available in prior years.
1. Annual Exclusion Gifts
The annual gift tax exclusion for 2018 is $15,000 per person, or $30,000 per married couple. When deciding whether to make a gift, your options include making the gift to the person directly, to a Uniform Transfers to Minors account for the person’s benefit (if he or she is a minor), to a trust (if structured to receive annual exclusion gifts) for that person’s benefit, or to a 529 Plan for education established for such person’s benefit. Remember that there are separate, unlimited, gift tax exclusions for tuition and medical payments. Those gifts must be made directly to an educational institution or medical provider and are not limited by the annual exclusion amount. The TCJA provides that up to $10,000 in 529 Plan distributions may be used annually for education costs for elementary through high school (kindergarten through 12th-grade). You may also decide to maximize a gift to a 529 Plan in the amount of $75,000 during a single year, which for gift tax purposes you may elect to spread over five years and thus not exceed the annual gift tax exclusion of $15,000 per person.
Note that the annual gift tax exclusion for 2019 will remain at $15,000 per person / $30,000 per married couple.
2. Charitable Giving
The TCJA raised the standard deduction to $24,000 for a married couple filing jointly, $18,000 for head-of-household, and $12,000 for individuals. In order to itemize deductions, allowable deductions must be in excess of the standard deduction amounts. If you would otherwise take the standard deduction, you might consider donating appreciated assets with long-term capital gains and giving what would have been your 2019 gifts in 2018 (known as “gift bunching”).
If you are planning to make larger charitable gifts, you might want to establish your own donor-advised fund or private foundation, which would allow you to make charitable gifts during your lifetime and may also allow you to maximize your current-year tax deduction. Any donor-advised fund or private foundation could be incorporated into any estate planning documents you may have or wish to establish.
3. Income Tax Planning and Estimated Taxes
Taxpayers should consider recognizing some unrealized losses to decrease their overall capital gains burden for 2018. The tax rate for long-term capital gains for those in the highest tax bracket is 20%, plus the Net Investment Income tax of 3.8%, and Massachusetts also charges its own 5.2% tax on long-term gains. It is important to consult with your attorney or tax professional before “harvesting” capital losses.
The TCJA also limits deductions for state and local income and real estate taxes to $10,000 annually, which may affect when you decide to pay your fourth quarter state and local taxes.
4. Retirement Accounts – Contributions and Roth IRA Conversions
If you have already taken your required minimum distribution (RMD) for 2018, or need to do so before year-end to avoid penalties, consider converting your traditional IRA to a Roth IRA. Before taking any action, it is important to carefully analyze the income tax ramifications of a conversion and whether the long-term benefits of a Roth outweigh your income tax consequences for 2018 (or beyond). Under the TCJA, once a Roth conversion is made, it is irrevocable.
5. Changing State Tax Residency
Heading into the new year may be a good opportunity to examine whether it is time to consider changing your state residency. With the Massachusetts estate tax exemption remaining static at $1 million per person, estate tax due to the Department of Revenue is a reality for many Massachusetts resident families.
States such as Florida and New Hampshire do not have a state estate tax. There may also be income tax benefits to changing residency to a particular state, which should be discussed with your estate planning attorney and tax professional.
At the federal level, note that the TCJA raised the federal estate, gift and GST (generation skipping transfer) tax exemption to $11.18 million per person, indexed for inflation, but this increase is set to expire December 31, 2025. This means that as of 2026, without additional changes to the law, the relevant federal estate, gift and GST tax exemption amounts will revert to the prior $5 million amounts as adjusted for the inflation factors.
6. Revisit Grantor Retained Annuity Trusts (GRATs) and Intra-Family Loans
GRATs and loans between family members generally use the applicable federal rates (AFRs) which continue to be low, although the interest rates change monthly. As long as the assets transferred to a GRAT appreciate at a rate above the AFR, there is a tax-free gift of the appreciation to the trust beneficiaries at the end of the annuity term. You should consult your estate planning attorney for more information on GRATs and other estate planning tools used to pass wealth to the next generation while minimizing estate taxes.
7. Estate Planning Documents and Beneficiary Designations
Finally, year-end is a good time to revisit your estate planning documents or finalize documents that may be awaiting your signature. It is also important to review your current beneficiary designations on your retirement accounts and life insurance policies to ensure that not only are there both primary and contingent beneficiaries designated on each account but that those beneficiary designations align with your estate plan and estate planning goals. For example, the year-end presents an opportunity to review whether your estate planning trust should be added as either the primary or contingent beneficiary on such accounts. Of course, if you have recently been though a significant life event such as marriage, divorce, or the death of a loved one, it is paramount to review your estate planning documents and beneficiary designations to confirm whether any changes are in order.
Please feel free to contact any member of our Private Client practice group with any questions you may have and to discuss the TCJA’s relevance to your particular situation.