As the nation awaits the results of an impeachment hearing and anticipates the election of our next president, high net worth individuals further contemplate the results of these historic events on their estate planning goals. Next year's election may bring with it additional sweeping changes to the transfer tax system most recently impacted by the 2018 Tax Cuts and Jobs Act. A democratic president and Congress may substitute or augment the current transfer tax system with a wealth tax in an effort to redistribute and equalize wealth and responsibility across the nation. On the other hand, a republican president and Congress may augment or make permanent the transfer tax system currently in place. It is even possible that the transfer tax system could be repealed entirely.

In November of this year, Treasury finalized regulations that confirmed that the estates of those who make gifts during their lifetimes that take advantage of the augmented exemption amounts currently set to expire after 2025, will not be penalized. Therefore, in these potentially changing times, as 2019 comes to a close, Steptoe's private client practice would like to take this opportunity to highlight some of the planning opportunities that may be of interest in areas of wealth transfer, income tax, real estate investment planning and immigration. 

2019 Year End and Immediate Estate Planning Considerations

  • Annual gifts may be made of up to $15,000 per person to an unlimited number of individuals without consuming any lifetime exclusion amount or incurring a gift tax. This amount will remain unchanged in 2020. A married couple together is able to gift $30,000 to each donee in 2019 and 2020. The limitation on annual gifts made to noncitizen spouses is capped at $155,000 in 2019 and will be adjusted for inflation to $157,000 in 2020.
  • Review current estate plans to ensure any "formula gifts" of exemption amounts are still appropriate, given the increased exemption amounts. The exemption amount for estate, gift and generation-skipping transfers (GST) is currently capped at $11.4 million for 2019. This amount will increase to $11.58 million for 2020, but under current law is slated to revert back to $5 million (indexed for inflation) for decedents dying and gifts made after December 31, 2025.
  • Make sure all necessary "Crummey Notices"  have been sent to appropriate parties to ensure corresponding gifts made in trust qualify for the annual exclusion (particularly applicable to insurance trusts).
  • Maximize annual IRA and other deferred compensation contributions. 
  • Maximize income tax deductions by making charitable gifts. 

Estate Planning to Consider Going Forward Into 2020

  • Consider making additional gifts to take advantage of the limited window of time for increased gift tax exemption planning. Gifts made during your lifetime remove both the value of the gifted property as well as any appreciation on that property from your taxable estate, thus minimizing what may be taxed at your death. Federal estate, gift, and GST tax applicable exclusion amounts may be used to make gifts during your lifetime or at death. This exclusion amount allows for a significant amount of lifetime gifting without gift tax consequences.
  • The increased exemption is a "use it or lose it" opportunity under current law and offers the potential to pass along significant wealth to current and future generations free of estate, gift and GST tax. When the new tax laws came into effect, many taxpayers expressed concern about the possibility that if the exemption amounts do revert to $5 million in 2026, there could be a "claw-back" of amounts in excess of that gifted during lifetime. However, recently issued final regulations confirm that no claw-back of used exemption was intended.
  • Property included in your taxable estate will continue to receive a step-up in basis at your death. Assets gifted during your lifetime will not receive a step-up in basis at death. Therefore, income tax considerations must be taken into account in deciding whether to make lifetime gifts. For those whose total taxable estate is well under the new higher exemption levels it may make sense to make transfers at death rather than during life and to consider "undoing" certain plans to bring appreciated assets back into the estate. However, the avoidance of capital gain tax must be weighed against any state level estate taxes on such assets as well as the risk that the assets will appreciate beyond the exemption actually available at the time of death.
  • State transfer tax laws must also be taken into consideration. For example,
    • Although New York raised its estate tax exemption incrementally to ultimately match the federal exemption, as of January 1, 2019, with the increased federal exemption, there will continue to be a disconnect between the New York exemption (currently $5.49 million and increasing to $5.85 million for 2020) and the federal exemption until 2026, when the federal exemption is slated to revert back to $5 million (indexed for inflation).
    • The New York estate tax exemption is eliminated entirely for those estates that exceed the state exemption amount by more than five percent.
    • New York also includes certain lifetime gifts made between April 1, 2014 and December 31, 2025 and within three years of death in the decedent's New York taxable estate.
  • As interest rates are still relatively low, consider making intra-family loans as a transfer tax free way to move appreciation above the low interest rate to the next generation.
  • Review your current estate plan to ensure that it appropriately addresses major life events such as a marriage, divorce, or birth of a child or grandchild.
  • Consider whether existing trusts need to be decanted to adjust the way property is distributed to certain beneficiaries by changing the trust provisions.
  • Review all beneficiary designations to ensure that they do not conflict with your overall testamentary plan.
  • Lifetime gifts may be further leveraged by the use of dynasty trusts to which GST tax exemption is allocated. These transfers allow property to pass in trust for the benefit of multiple generations free of estate, gift, and GST tax. Dynasty trusts also are a valuable tool to protect assets from creditors, including spouses in the event of a divorce, to make sure younger generations are protected from having too much wealth in their own hands, and in some cases to preserve unity of ownership.
  • Low interest rates continue to make Grantor Retained Annuity Trusts (GRATs) and sales to grantor trusts effective planning tools.
  • Qualified Personal Residence Trusts (QPRTs) can also be attractive and effective planning tools.

Summaries of Effective Planning Techniques


Other Issues to Consider - State Issues, Real Estate, Immigration

State Specific Issues

Some states have taken steps to decouple from some of the federal income tax changes. For example, New York does not follow the new federal rule that alimony payments made pursuant to a divorce or separation agreement signed after December 31, 2018 are no longer treated as taxable income to the recipient or deductible by the payer. Instead, New York allows alimony to be subtracted from federal adjusted gross income in computing New York taxable income. New York also eliminated the requirement to itemize individual deductions for federal purposes in order to itemize for New York purposes, which allows individuals to choose standard or itemized deductions for state purposes even if they do not do so for federal purposes. New York also allows individuals, trusts and estates to claim some deductions on their New York returns that are no longer available for federal purposes.

New York City Real Estate Taxes

As of July 1, 2019, taxes on transfers of residential property in New York City, including cooperative apartments, valued at $3 million or more and non-residential property valued at $2 million or more increased from 0.4% to 0.65%. In addition, an additional incremental mansion tax for transfers of New York City residential property valued at $2 million and above was imposed. The New York base mansion tax rate is 1%. The additional incremental mansion tax adds 0.25% for properties selling over $2 million and rises to an additional 2.9% for properties selling for $25 million or more.

Additional Proposed Regulations Released on Qualified Opportunity Funds

Qualified Opportunity Funds (QOFs) offer an opportunity for investors to defer or even avoid certain taxable gains.  Investors can defer tax on capital gains by investing those gains in QOFs, which will put the money to work in projects and businesses in low-income areas called "Opportunity Zones." An initial set of proposed regulations were released in October 2018 that provided guidance on the types of gains that qualify, the requirements for investing in the QOF, and the requirements for the QOF to invest in qualified opportunity zone property. However, many questions remained, creating uncertainty for QOFs and investors. In April 2019, a second round of proposed regulations were released which addressed many critical issues for funds and investors. These proposed regulations provided helpful guidance on structuring initial investments, treatment of deferred gains, tangible property requirements, basis step up questions and operating business requirements. However, open questions remain and additional guidance is anticipated.

Increase in Investment Levels for the EB-5 Program

The biggest news for the EB-5 investor visa category in 2019 was the long-anticipated increase in the minimum investment requirements. For nearly three decades, US permanent residency based upon capital investment in a US commercial enterprise came at a cost of either $500,000 or $1 million, depending on the project and geographic location. In November 2019, the minimum at-risk investment needed to qualify for the EB-5 program increased to $900,000 in designated low employment areas and $1.8 million elsewhere in the US.

As expected, investors rushed to initiate EB-5 petitions before the effective date of the increase in investment requirements. The long-term impact of this change remains to be seen, with speculation that it may deter EB-5 investment and create difficulties for developers who depend on EB-5 capital. For the wealthy applicants in search of US permanent residence for themselves and/or their families, the EB-5 program continues to be attractive, but is by no means an easy or fast track process. Applicants face long processing times and procedural hurdles, during which time the funds are locked into the EB-5 enterprise. The program has long faced criticism and SEC investigations and pressure to end or reform the program. While EB-5 is viewed as a good option for some high net worth individuals, for others, there is a preference for other investment-based options, particularly the E-2 treaty investor and L-1A intracompany transferee visa categories, which avoid the EB-5 program risks and burdens while providing sought-after US immigration benefits.

Citizens of Israel and New Zealand Now Eligible for E-2 Investor Visas: Portugal May be Next

After many years of effort by both the US and Israel, in May 2019, Israeli citizens became eligible for the valuable E-2 investor visa option. Shortly thereafter, in June 2019, New Zealand joined the list of E-2 visa eligible countries. The E-2 is a reciprocal, treaty-based, option providing a temporary immigration status based upon qualified investments in the US. As a treaty-based category, E-2 visas are only available to citizens of treaty countries—with dual citizenship and strategic acquisition of E-2 eligible citizenship often playing a part in immigration planning. Eyes are on Portugal as the next potential E-2 eligible country, with legislation adding Portugal to the E-2 list pending in Congress as of this writing.

The E-2 visa category carries a number of advantages over other investment-based options. The E-2 category is temporary, but can be renewed indefinitely. The classification as temporary can be advantageous to those who do not wish to hold US permanent residence for tax or other reasons. The E-2 category is often preferred to the EB-5 immigrant investor program, as there is not a set minimum investment requirement. The appropriate amount varies depending on the nature of the business and other factors, but is typically well below the recently-increased investment required for the EB-5 category. For some, this provides an avenue to facilitate immigration options for their grown children or other family members through gifting, with the benefit of a significantly faster pace and less financial commitment than EB-5.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.