In Brief

The Tax Cuts and Jobs Act of 2017 expanded the federal estate, gift, and generation-skipping transfer tax exemption amounts, dramatically changing the landscape of estate tax planning. Less appreciated has been the TCJA’s creation of a new tax-deferred investment opportunity called a qualified opportunity zone (QOZ), which holds the potential to similarly reshape income tax planning. The author covers how the exemption increase will affect estate planning in general, then describes the mechanics of QOZs, including some clarifying guidance released by the IRS in late 2018 and the second tranche of proposed regulations released by the Treasury Department and the IRS in April 2019.


Estate planning has seen a seismic shift brought about by the dramatic, temporary expansion (to sunset in 2026) of the federal estate, gift, and generation-skipping transfer (GST) tax exemptions, which have now further increased to $11.4 million in 2019 ($22.8 million for a married couple) and apply to only 2 out of every 1,000 Americans. The focus of estate planning is increasingly shifting to maximizing the step-up in basis upon death via qualified terminable interest property (QTIP) trusts, income tax planning, using dynasty trusts as an asset management and creditor protection vehicle, and planning for the care and needs of elderly Americans.

Rather than being treated as a secondary aspect of estate planning, income tax planning has been thrust into a leading role. In addition to traditional estate planning (including wills, trusts, and planning with life insurance) and maximization of the step-up in basis upon death, the new focus has broadened significantly to encompass income tax planning strategies for wealthy individuals, including the use of qualified opportunity funds.

Estate Tax Planning Issues

The temporarily expanded exemptions and clawback concerns.

The Tax Cuts and Jobs Act of 2017 (TCJA; PL 115-97) provides significant estate planning opportunities for high-net-worth individuals to take advantage of the temporary doubling of the estate, gift, and generation-skipping transfer (GST) tax exemptions. This increase creates both a window of opportunity for gifting due to the significant expansion of the exemptions and a need to review existing wills and other estate planning documents to ensure that they continue to carry out planning objectives.

There is a significant wrinkle in the new law, however, as it “sunsets” its doubling of the exemptions on January 1, 2026, when they will revert to their pre-2018 exemption levels (indexed for inflation). This will incentivize wealthy individuals to begin to use their increased exemptions before potentially losing them in 2026.

As a consequence, some planners have expressed concern that the sunset provisions could potentially pose a “clawback risk” if an individual were to gift away his entire gift tax exemption during his lifetime and then die after December 31, 2025—that is, when the unified estate and gift tax exemption reverted to less than the amount that gifted away. The Treasury Department has now issued guidance in the form of proposed regulations—referred to as the “anti-clawback regulations”—to clarify that this no longer poses a risk. (See the IRS’s proposed rule, “Estate and Gift Taxes; Difference in the Basic Exclusion Amount,” Nov. 23, 2018,

Planning with the expanded exemption.

As of January 1, 2019, individuals are now able to transfer $11.4 million free of estate, gift, and GST tax during their lives or at death; married couples can transfer $22.8 million during their lives or at death. In addition, due to the portability of the deceased spouse’s unused exclusion amount, any unused federal estate tax (but not GST tax) exemption for the first spouse to die may be used by the surviving spouse for lifetime gifting or at death. (The TCJA did not change the 40% tax rate for estate, gift, and GST taxes nor modify the rules providing for a step-up in basis to fair market value at death that generally apply to most inherited property.)

Individuals who previously exhausted their $5.49 million gift tax exemption now have the opportunity to gift another $5.91 million (or $11.82 million in the case of a married couple), and can even make such gifts to grandchildren or more remote descendants (or to trusts for their benefit) without incurring a GST tax. The annual gifting exclusion amount is $15,000 (or $30,000 if spouses elect to split gifts) for gifts made in 2019.

The increase of the exemptions gives individuals vast opportunities to leverage their gifting for multiple generations through the following techniques:

  • Topping off prior planning by making gifts to existing or new family trusts, including generation-skipping trusts, insurance trusts, spousal lifetime access trusts (SLAT), and grantor retained annuity trusts (GRAT)
  • Making new sales to intentionally defective grantor trusts (IDGT) or, where appropriate, making cash gifts to facilitate the prepayment of existing installment obligations to senior family members
  • Making new intrafamily loans or, where appropriate, cash gifts to facilitate the pre-payment of existing loans from senior family members.

State estate tax–specific considerations may apply in the wake of the temporarily expanded federal exemptions. For example, the expanded federal exemptions give New Yorkers greater opportunities to plan ahead to reduce their New York taxable estates (with state estate taxes as high as 16%). New York has a unique “cliff” feature in its estate tax law whereby the benefits of the New York basic exclusion amount (currently $5.74 million) quickly phase out if the decedent’s New York taxable estate, plus certain taxable gifts made within three years of death, is between 100% and 105% of the exclusion amount available on the date of death. This “cliff” completely wipes out the benefits of the exclusion if the decedent’s New York taxable estate exceeds 105% of the exclusion amount. In addition, at certain taxable estate levels it can produce a confiscatory marginal New York estate tax rate in excess of 100%. As a result, the New York estate tax exclusion only fully benefits individuals whose New York taxable estates fall below the New York exclusion amount in effect on the date of death. In addition, the New York estate tax exemption is not portable to spouses for lifetime gifting or for use on the survivor’s New York estate tax return, in sharp contrast to the federal estate tax exemption.

As a result of the dramatic spread between the federal and New York estate tax exemptions, decedents whose estates are below the federal estate tax exemption amount may still owe significant New York estate taxes. In addition to confirming that will provisions can fully soak up the New York estate tax exemption of the first spouse to die (including via an executor’s decision not to make a QTIP election for property in trust), New Yorkers may consider gifting such an amount as would bring their taxable estates below the New York estate tax exemption amount. Depending upon the circumstances, the total combined New York estate tax savings for a married couple can potentially exceed $1 million.

Qualified Opportunity Funds and Opportunity Zones

The TCJA includes a new tax incentive provision intended to promote investment in economically distressed communities, referred to as “opportunity zones.” Through this program, investors can achieve the following three significant tax benefits:

  • The deferral of gain on the disposition of property to an unrelated person until the earlier of the date on which the subsequent investment is sold or exchanged or December 31, 2026, as long as the gain is reinvested in a qualified opportunity fund (QOF) within 180 days of the property’s disposition
  • The elimination of up to 15% of the gain that has been reinvested in a QOF, provided that certain holding period requirements are met
  • The potential elimination of tax on gains associated with the appreciation in the value of a QOF, provided that the investment in the QOF is held for at least 10 years.

A qualified opportunity zone (QOZ) is an economically distressed community where new investments may, under certain conditions, be eligible for preferential tax treatment.

A qualified opportunity zone (QOZ) is an economically distressed community where new investments may, under certain conditions, be eligible for preferential tax treatment. Localities qualify as QOZs if they have been nominated for that designation by the state and that nomination has been certified by the IRS. All QOZs have been designated as of June 14, 2018, and are available on the Treasury Department’s website (

A QOF, in turn, is an investment vehicle that is established as either a domestic partnership or a domestic corporation for the purpose of investing in eligible property that is located in a QOZ and uses investor gains from prior investments as a funding mechanism. Investors can receive the tax benefits of QOZs even if they do not live, work, or maintain a business in a QOZ; they just need to invest in a QOF.

To become a QOF, the entity self-certifies. It must meet certain requirements, in particular a general requirement that at least 90% of its assets be “qualified opportunity zone property” used within a QOZ (as further discussed below), but no approval or action by the IRS is required. To self-certify, the entity merely completes Form 8996, Qualified Opportunity Fund, then attaches that form to the entity’s timely filed federal income tax return for the taxable year (taking into account extensions). Proposed regulations issued in October 2018 generally permit any taxpayer that is a corporation or partnership for tax purposes to self-certify as a QOF, provided that the entity self-certifying is statutorily eligible to do so. It is expected that taxpayers will use Form 8996 both for initial self-certification and for annual reporting of compliance with the 90% asset test of IRC section 1400Z-2(d)(1); Form 8996 should be attached to the taxpayer’s federal income tax return for the relevant years.

Deferral of Gain Through Timely Reinvestment

To qualify for these tax benefits, an investor’s reinvestment in the QOF must occur during the 180-day period beginning on the date of the sale. Under IRC section 1400Z-2(a)(2), a taxpayer may elect to defer the tax on some or all of that gain. If, during the 180-day period, the taxpayer invests in one or more QOFs an amount that was less that the taxpayer’s entire gain, the taxpayer may still elect to defer paying tax on the portion of the gain invested in the QOF. If, in contrast, an amount in excess of the taxpayer’s gain is transferred to the fund (an “investment with mixed funds”), the taxpayer is treated, for tax purposes, as having made two separate investments—one that only includes amounts as to which the investor’s deferral election is made, and a separate investment consisting of other amounts.

Importantly, the law requires only that the gain be reinvested in the QOF, not the total sales proceeds. The proposed regulations have clarified that, in general, only capital gains are eligible to be invested in a QOF.

In addition, and in contrast to IRC section 1031 like-kind exchanges (another mechanism of gain deferral through rein-vestment), in the QOF context the cash from the sale does not need to be specifically tracked or escrowed. Instead, the requirement is merely that an amount of cash equal to the gain on the sale be rein-vested in a QOF within 180 days of the property’s disposition (subject to potential relief in the case of certain pass-through entities).

The taxpayer’s basis in the QOF is initially zero, but will be increased by 10% of the deferred gain if the investment in the QOF is held for five years, and increased by an additional 5% if the investment in the QOF is held for seven years. Thus, if a gain on the sale of property is timely rein-vested in a QOF, the taxpayer may be able to decrease the taxable portion of the originally deferred gain by as much as 15% (via a corresponding step-up in basis). The taxpayer makes an election to defer the gain, in whole or in part, when filing the return on which the tax would otherwise be due if it were not deferred.

The tax incentives of this program go well beyond tax deferral (even putting aside the potential basis adjustments discussed above), as subsequent gain on the appreciation in the value of the QOF is capable of being fully excluded from income. In order to qualify, an investor must hold its reinvestment in the QOF for at least 10 years.

The Proposed Regulations

On October 19, 2018, the IRS released the first set of proposed regulations ( as well as Revenue Ruling 2018-29 to clarify certain aspects of the QOZ provisions. The IRS requested comments on several provisions in the proposed regulations, which state that they may apply to transactions occurring before the finalization of such regulations, provided they are applied consistently. Certain gaps in the proposed regulations were later filled in by a second tranche of proposed regulations issued by the Treasury Department in April 2019 (

In addition, and in contrast to IRC section 1031 like-kind exchanges, in the QOF context the cash from the sale does not need to be specifically tracked or escrowed.

Only capital gains eligible for reinvestment.

The proposed regulations provide that only capital gains may be “rolled over” into a QOZ investment. This would preclude ordinary income from the sale of inventory, and might preclude gain recharacterized as ordinary income under certain recapture rules.

Partners in pass-through entities may reinvest share of entity’s gains from asset sales.

The proposed regulations include special provisions by which gain recognized by a partnership may (except to the extent the partnership elects to roll over the gain itself) flow through to the partners and be reinvested by such partners into QOFs. It was previously unclear whether the partner or the partnership had to make such reinvestment. In addition, there is the potential for such partners to have an increased period during which to reinvest gain into a QOF. The partnership’s 180-day period begins on the date of its sale, but if the gain flows through to the partners, the partners’ 180-day period begins on the last day of the partnership’s taxable year. Partners may instead elect to use the partnership’s 180-day period if they like (e.g., if the desired investment is already lined up).

QOFs always tested at end of calendar year.

The proposed regulations clarify that, while the initial testing date for a QOF (for purposes of the 90% asset test, discussed below) may be as long as six months after the QOF’s start date, there is always a testing date on the last day of the calendar year. Accordingly, QOFs that are formed near the end of a calendar year may need to meet the 90% asset test sooner than expected.

The proposed regulations do, however, provide flexibility for QOFs to select the date on which they begin to qualify (although QOFs must qualify as such prior to receiving qualifying investments), and in order for taxpayers to use preexisting entities as QOFs.

LLCs likely permitted.

The proposed regulations state that QOFs may include entities treated as partnerships for federal income tax purposes, which would presumably permit the use of limited liability companies.

Investors may hold investments past expiration of QOZ designation.

Although the statute provides that the QOZ designations expire after 10 years, the proposed regulations permit investors seeking to take advantage of the 10-year rule to hold their investments for an additional 20-year period—until December 31, 2047—and still receive the benefit of the exclusion from income of all post-acquisition appreciation.

Treatment of land.

The proposed regulations and Revenue Ruling 2018-29 provide that land is treated separately from the improvements thereon for purposes of the substantial improvement test, and they provide several important clarifications regarding the treatment of land. Revenue Ruling 2018-29 also provides that land, given its permanence, may never be treated as originally used by a QOF in a QOZ; however, the examples in the Revenue Ruling indicate that the land may qualify as QOZ business property if the improvements thereon qualify, even if such land is not improved. Accordingly, for the substantial improvement test, a QOF need only substantially improve the building on a parcel of acquired land in order for the entire parcel to qualify for the 90% asset test.

In addition, the example in Revenue Ruling 2018-29 involves the conversion of a factory building into residential rental property. Because the building was already in existence and is being modified (rather than new construction), it must meet the substantial improvement test rather than the original use test. The example also seems to confirm that residential rental property does indeed qualify as potential QOZ property.

QOZ business “substantially all” means at least 70%.

QOFs may own QOZ businesses (rather than directly owning QOZ property), with the requirement that “substantially all” of the business’s assets be QOZ property. The proposed regulations provide that, solely for this purpose, “substantially all” means at least 70%. Accordingly, a QOF that owns a QOZ business may have as little as 63% of its capital invested in QOZ property (90% in the QOZ business, per the 90% asset test, times 70% of the business’s property). This may provide additional flexibility as to the timing of capital investments into a QOF and the use of such capital.

Working capital safe harbor.

The proposed regulations provide certain safe harbors relating to working capital and the asset composition of a QOF to the extent that such assets are held in QOZ businesses. Specifically, the “reasonable working capital” safe harbor of IRC section 1397C(e)(1) now also extends to QOZ businesses for a period of 31 months. Thus, a QOZ business can have as long as 31 months to deploy working capital, provided that the documentation requirements contained in the proposed regulations are satisfied. The IRS’s instructions to Form 8996 describe these documentation requirements in terms of the following four-part test that must be satisfied:

  • The working capital is designated in writing for the acquisition, construction, or substantial improvement of tangible property in a qualified opportunity zone.
  • There is a reasonable written schedule for the expeditious consumption of the working capital to achieve the goal set out in the item above.
  • The working capital will be completely consumed no later than 31 months after the amounts are first invested in eligible interests in the relevant QOF.
  • The working capital is consumed in a manner that is substantially consistent with the requirements in the previous three items.

A QOZ business can have as long as 31 months to deploy working capital, provided that the documentation requirements are satisfied.

Additional helpful clarification on the working capital safe harbor was provided in the Treasury Department’s second tranche of proposed regulations released in April 2019. The new proposed regulations give additional flexibility to the working capital safe harbor, including by allowing the written working capital schedule to provide for expenditures for broader costs of business operation, rather than only for the acquisition of qualifying QOZ business property. This safe harbor also will not be violated if the 31-month period is exceeded due to delays in receiving governmental approvals.

QOZ business income.

The April 2019 proposed regulations also contain many favorable provisions that focus on the operation of related businesses in opportunity zones not related to real estate. These include provisions relating to the ability of manufacturing, service, technology, and other operating businesses to the meeting QOZ requirements, including safe harbors for the treatment and the amount of business assets or business income that must be connected to the QOZ. Prior to the second tranche of the proposed regulations, many had been concerned that conducting a business in the QOZ but selling to customers outside the QOZ would fail to qualify. The second tranche of proposed regulations provides useful guidelines in connection with making these determinations.

Treatment of Partnership Liabilities and Permissibility of Distributions

The April 2019 proposed regulations provide important clarification surrounding the interaction between the “zero basis rule” and the partnership taxation rules of Subchapter K of the Internal Revenue Code. The QOZ statute provides that an investor who elects to roll over gains into a QOF will have a tax basis in the QOF interest of zero. Under general partnership taxation principles, however, partners generally receive tax basis for their share of partnership debt.

The April 2019 proposed regulations address this interaction by providing that a taxpayer’s initial basis in a QOF partnership will be increased by the taxpayer’s share of partnership indebtedness. As a result, investors in a QOF taxed as a partnership will, subject to general partnership taxation rules, be able to receive certain debt-financed distributions without incurring present tax or any deemed disposition of their QOZ investments. This will no doubt be a relief for many investors in QOFs that own real estate joint ventures, in which the ability to refinance and distribute proceeds is an important strategy. This provision may also allow a QOF partnership to provide liquidity for investors to pay the tax on their deferred gains at or prior to the end of 2026 without incurring additional tax on the distribution of the proceeds to pay such tax.

The April 2019 proposed regulations do not, however, extend similar leniency to QOFs that are treated as corporations or as real estate investment trusts (REITs). For these entities, as a general matter, any distributions (including distributions of refinancing proceeds prior to January 1, 2027) that are not treated as dividends for tax purposes will result in the inclusion of all or a portion of the investor’s deferred gain and be treated as a constructive disposition of the investor’s QOZ investment.

Gifts and bequests.

The April 2019 proposed regulations provide that, in general, gifts (other than to a grantor trust) will be treated as a disposition of the QOZ investment triggering inclusion of the deferred gain in income. In contrast, gifts to grantor trusts are not treated as a deemed disposition of the QOZ investment and therefore will not trigger inclusion of the deferred gain in income. In addition, a bequest upon death permits the transferee to step into the transferor’s shoes and continue to hold the QOZ investment as if the transferee were the original investor. The 5-year, 7-year, and 10-year holding period benefits tack to the transferee in the case of gifts to grantor trusts and bequests upon death.

Comment Letters

Several organizations, including the American College of Trust and Estate Counsel (ACTEC) and the NYSSCPA, have submitted comment letters to address open points in the legislation and the proposed regulations. ACTEC’s comments may be found at, while the NYSSCPA’s comments may be found at It is anticipated that additional comments will be forthcoming in response to the Treasury Department’s second tranche of proposed regulations.

Seize the Opportunity

The TCJA expanded many opportunities for taxpayers to minimize their tax liability. Given the dramatic changes to the estate tax landscape, income tax planning has come to the forefront as part of this integrated strategy. CPAs and financial planners should familiarize themselves with qualified opportunity funds and opportunity zones, among other tax planning strategies, in order to assist clients in maximizing the preservation of their wealth under the new tax law.

Kevin Matz, JD, CPA, LLM (Taxation) is a partner at the law firm of Stroock & Stroock & Lavan LLP, New York, N.Y.