Around The Water Cooler this morning, we’re talking about impact investing, family business succession planning, and estate tax liens.

  • The rise of impact investing poses unique concerns for trustees.  Impact investments are designed to align environmental, social, governance and faith-based goals with an investment portfolio.  Casey Clark and Andy Kirkpatrick examine whether impact investing is compatible with the Uniform Prudent Investor Act in Impact Investing Under the Uniform Prudent Investor Act.
  • The succession of a family business can often be akin to Odysseus’ passage through Charybdis, a treacherous whirlpool, and Scylla, a man-eating, cliff-dwelling monster in Homer’s Odyssey.  Approximately 70% of family businesses fail to successfully transition to the second generation, and 90% fail to successfully transition to the third generation.  In Advising Family Businesses in the Twenty-First Century, Scott Friedman, Andrea HusVar, and Eliza Friedman apply new insights from the fields of social neuroscience and positive psychology and offer a new approach to the succession of family businesses.
  • The IRS has issued Interim Guidance which clarifies the process for obtaining a Release of an Estate Tax Lien.  At the moment of death, an automatic estate tax lien is imposed on a decedent’s property, and the lien attaches to all property of the estate.  If an estate wishes to sell property before receiving closing letters from the IRS, the estate would prepare and file IRS Form 4422, “Application for Certificate Discharging Property Subject to Estate Tax Lien.”  In the summer of 2016, the IRS began requesting additional documentation and requiring that the net proceeds of the sale be paid over to the IRS or held in escrow until IRS closing letters are issued.  In Update on New IRS Release of Estate Tax Lien Requirements, Shaina Kamen and Michael Schwartz detail the Interim Guidance and new requirements.

The Act provides unique planning opportunities, but it also presents potential pitfalls for estate plans drafted before 2018.  It is critical that clients review current plans to ensure that they meet tax and non-tax objectives and determine if they want to take advantage of the increased exemptions.  


The tax bill commonly referred to as the Tax Cuts and Jobs Act (the “Act”) was signed into law by the President on December 22, 2017 and provides unique opportunities and challenges for estate planning clients.  The changes are the broadest rewrite of the U.S. tax code since 1986 and will have widespread impact on both individuals and businesses.  With few exceptions, the provisions of the Act are effective for tax years beginning on or after January 1, 2018, and most of the provisions pertaining to non-corporate taxpayers will expire on December 31, 2025.  The provisions of the Act relating to estate, gift, and generations skipping transfer (“GST”) taxes are not permanent and will expire on December 31, 2025.  No one knows what will happen between now and December 31, 2025.  However, considering the fact that the legislation was passed along party lines, the provisions of the Act could be substantially altered before December 31, 2025 if the political pendulum swings in the other direction in coming election cycles.


Before diving into how the Act changes estate, gift, and GST taxes, it is helpful to consider what the Act does not change.  During his campaign, then candidate Trump pledged to repeal the estate tax.  The House version of tax reform proposed full repeal of the estate tax.

The Act does not repeal the estate tax or alter its fundamental structure.  The Act does not change the unlimited marital deduction or the unlimited charitable deduction, and the Act does not change estate tax rates.  The Act retains “portability” of estate tax exemption between spouses, which provides that the amount of federal estate tax exemption that a deceased spouse does not use can be transferred to the surviving spouse.

Likewise, the Act does not fundamentally alter the federal gift tax or the federal generation skipping transfer tax. There is still an unlimited gift tax exclusion for payments of tuition and medical expenses; there is an “annual exclusion” that allows for tax-free gifts (increased to $15,000 per person and $30,000 per couple for 2018); and there is an unlimited marital deduction for gifts to spouses who are U.S. citizens.

Also of note, the Act does not change the basis rules for assets received by gift or for assets received at death.  Assets received by gift take a carryover basis; that is, the basis in the hands of the donee is the same as the basis in the hands of the donor.  Assets received at death receive a step-up in basis to the fair market value of the property generally on the donor’s date of death.


The Act doubles the amount an individual may transfer free of tax either by gift during lifetime or at death.  Before the Act was enacted into law, the exemption amounts in 2018 would have been $5.6 million per individual and $11.2 million per couple.  Under the Act, in 2018, the exemption amounts in 2018 will now be $11.2 million per individual and $22.4 million per couple (these are approximate figures and the final figures may vary slightly since the method for making annual inflation adjustments will change).  For years 2019 through 2025, the exemption amounts will be adjusted for inflation.  Since the estate, gift and GST provisions of the Act sunset after December 31, 2025, the exemption amount in 2026 will revert to pre-Act levels ($5.6 million per individual and $11.2 million per couple, as adjusted for inflation).

Given the increase in the exemption amounts, as a practical matter the Act renders federal transfer taxes irrelevant for all but the wealthiest, and only a small amount of estates will be subject to the estate tax.  In 2000, 52,000 estates paid estate tax.  The Joint Committee on Taxation estimates that the number of estates which will pay any estate tax will drop from 5,000 in 2017 to 1,800 under the new law.

Also included in the Act are various income tax provisions which affect trusts and which provide potential planning opportunities for minimizing trust income taxes.  Trusts should benefit from lower income tax rates (including a top income tax rate of 37%, decreased from 39.6%), and may also be able to take advantage of a new 20% deduction for qualified business income.

A new limitation on the deductibility of state and local income taxes will also apply to trusts and may increase the importance of strategies designed to reduce those taxes. These strategies include changing the income tax residence of existing trusts, the use of grantor trusts, converting existing grantor trusts to separate taxpayers, and making distributions to beneficiaries who may have lower tax burdens.

Also of note to many estate planning clients is the change with respect to Section 529 plans.  Section 529 plans are designed to allow tax-free accumulation of education savings. Under current law, funds in these plans may be distributed income tax free for qualified higher education expenses. The new law allows distributions to be made on the same basis to elementary or secondary schools as well, subject to a limit of $10,000 per plan beneficiary per year.


The increased federal estate, gift and generation-skipping transfer tax exemptions will present significant planning opportunities and may also have unintended, and potentially negative, consequences for existing estate planning documents.  Given the significant changes to the federal estate, gift and generation skipping transfer taxes effective on January 1, 2018, clients should consider the following:

Review and Revision of Existing Estate Plans

Your current estate plan reflects the transfer taxes in effect at the time your documents were executed.  In light of the current changes to those transfer taxes, your estate plan should be reviewed to ensure that it still accomplishes your estate planning objectives.  All clients that have previously engaged in tax planning should revisit their estate plans, including the dispositive provisions of all testamentary and non-testamentary trusts. These plans should be evaluated both for tax and non-tax purposes.

Of critical importance, the increase in the exemption has immediate implications for estate plans which use formula clauses.  A formula clause is a provision which allocates assets by reference to the exemption amount, the marital deduction, the GST exemption, or the charitable deduction.  For example, many estate plans allocate estate assets to a marital trust held for the sole benefit of the surviving spouse and a credit shelter trust (also referred to as a family trust or a bypass trust) held for the benefit of the surviving spouse and/or the decedent’s descendants.  Many estate plans fund the trusts using a formula clause which allocates the maximum exemption amount to the credit shelter trust and the rest and remainder to the marital trust.  For all but the wealthiest of individuals, a formula clause may result in all of a decedent’s assets (other than those passing by beneficiary designation or joint ownership) passing to the credit shelter trust; that is, the increased exemption amount may result in only the credit shelter trust being funded and nothing will pass to the marital trust for the sole benefit of the surviving spouse.  This may be a disastrous result given the client’s intentions.

There may also be opportunities to remove limitations in existing trusts. For example, mandatory income distribution standards designed to qualify a trust as a qualified terminable interest property (QTIP) trust may no longer be needed. The trust could be amended to replace the mandatory distribution standards with discretionary distribution standards to provide more flexibility.

Those clients for whom federal transfer taxes are no longer relevant should consider reworking tax and trust planning to eliminate unnecessary complexity or consider moving assets back into their estates to take advantage of the step-up in basis at death.

Build Flexibility into Plans

Considering the fact that the Federal tax law changes are scheduled to sunset after December 31, 2025 and the possibility that changes in Congress and the White House may bring about change to the Act, flexibility is critical for clients with potentially taxable estates. Tools and techniques for building in flexibility to an estate plan include powers of appointment, disclaimers, alternate distribution provisions that change depending on the exemption amount, and trust protectors.

Lifetime Gifting

For those clients who are facing the prospect of paying estate tax, the increase in the gift tax exemption to $11.2 million per individual and $22.4 million per couple may present an exceptional opportunity for lifetime planning through significant gifts made between January 1, 2018 and the sunset of the increased exemptions on December 31, 2025.

For many clients, this will mean adding property to trusts that they have already created.  For others, this will mean establishing new trusts to which to contribute assets.  Other uses of the increased exemption amount include forgiving family indebtedness and unwinding installment sales.

By gifting property during life, donors may successfully avoid transfer taxes on post-gift appreciation.  Further, property gifted to a trust is protected from the creditors of a beneficiary.  Given that the increase in exemption is scheduled to expire or may be reduced by a future Congress, there is an added incentive to accelerate lifetime gifting.  If the client is considering gifts for non-tax reasons (such as asset protection), the increased exemption amount may be enough to tip the scales in favor of a lifetime gift.

Note that one trade-off for making a lifetime gift with appreciated property is that the opportunity for a basis step-up at death is lost.

Opportunities for Generation Skipping Transfer Tax Planning

The benefits of funding dynasty trusts that last for generations will be amplified with the increased GST exemption amount.  Instead of making outright gifts to skip persons, clients can establish a GST trust and allocate the increased exemption amount to such trust, rendering it fully exempt from GST tax.  For clients with existing trusts to which no GST tax exemption was allocated, 2018 (until the sunset) may be the time to make a late allocation. For clients with existing GST tax exempt and non-exempt trusts, the period of increased exemption could be the ideal time to make distributions out of the non-exempt trusts either directly to skip person beneficiaries or to a GST tax exempt trust.

Domestic Asset Protection Trusts

Now may be an ideal time to establish and contribute assets to a self-settled domestic asset protection trust (DAPT).  Establishing and funding a DAPT may not only remove assets (including future appreciation) from a client’s estate but also provide ongoing asset protection for the term of the trust.

Re-Inclusion of Assets

Clients that have made previous lifetime transfers should revisit those transfers in light of the new law to ensure they still meet the client’s planning objectives.  For example, assume that a client transferred family limited partnership or family limited liability company interests to a trust.  Depending on the life expectancy of the client and the extent of the client’s estate, the client should consider techniques to re-include the partnership interests in the client’s estate to take advantage of the basis step-up.  One technique to consider is to give the client sufficient incidents of ownership to trigger inclusion of the assets in his or her estate.


The Act provides unique planning opportunities, but it also presents potential pitfalls for estate plans drafted before 2018.  It is critical that clients review current plans to ensure that they meet tax and non-tax objectives and determine if they want to take advantage of the increased exemptions.  Looking ahead to the sunset of the Act on December 31, 2025, the challenge is to plan for where we are now taking full advantage of the increased exemptions and build in flexibility for where we may be in the future.


* Please note: This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your situation and any specific legal questions you may have. Readers should not act upon this information without seeking professional counsel.  Please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.