By Elizabeth Wynn
2018 Tax Updates
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which brought major changes to the wealth transfer and estate tax systems. The new law is effective from January 1, 2018 through December 31, 2025. However, there are no assurances that these changes will remain the same. Future Congressional legislation could amend or revoke them. Without further legislation, the new exemption amounts will revert to their prior levels of 2017.
In 2017, the federal estate, gift, and generation-skipping transfer tax exemption (GST) amounted to $5.49 million per person. The 2018 Tax Cut and Job Act statute increased that amount to $11.2 million per person. For a married couple, the combined exemption amount will be about $22.4 million. Consequently, a single person or a married couple, at the time of the survivor’s death, with an estate below these new amounts will not pay estate tax. These new exemption amounts will be adjusted each year for inflation.
Beginning in 2018, the increased amounts allow a single person to transfer an additional $5.7 million or a married couple to transfer an additional $11.4 million. The additional transfers can be made without incurring any current or future gift, estate, or GST taxes.
For families with taxable estates, the Act maintains a 40% tax rate on estates in excess of the applicable exemption amounts. The “step-up tax basis“ rule adjusts the tax basis from original value to date of death for inherited property. It remains unchanged. Accordingly, any appreciation made during the original owner’s lifetime is disregarded for income tax purposes when assets are sold by the owner’s estate or its beneficiaries.
Married couples also continue to enjoy the benefit of “portability.” Portability allows the personal representative, executor, or trustee of a deceased spouse to make an election on the decedent’s estate tax return to transfer or “port” such deceased spouse’s unused exclusion amount to the surviving spouse. Consequently, any unused exemption amount can be added to the exemption amount of the surviving spouse to alleviate or completely eliminate the surviving spouse’s taxable estate.
These substantial changes in the federal estate, gift, and GST tax exemptions present a critical need to review your existing estate planning documents to ensure they still meet your needs and will not create unintended tax consequences. If you are one of the many families without an estate plan in place, now is the time to ensure your wishes are documented to best protect your family.
If you are fortunate enough to be financially secure and confident that you can maintain your standard of living for the foreseeable future, you may consider taking advantage of the new gift tax and GST tax exemption amounts either outright, with a new or existing trust, or by using other available techniques. However, please be aware that property gifted during your lifetime does not enjoy the tax step-up basis at your death. As a result, it is critical to give careful consideration as to which assets should be gifted and which should be given through your estate at your death.
Also, beginning in 2018, each of us is also allowed to give $15,000 annually to an unlimited number of recipients without gift tax consequences. This amount is in addition to the increased amounts discussed above, and was increased from the 2017 amount of $14,000. This means that a married couple can gift $30,000 per year to as many people as they wish.
By undertaking your estate and gift planning now, you are able to lock in the tax savings under the new law, even if the amounts are lowered by future legislation. You will be maximizing the benefits from these very favorable, yet not permanent, tax exemptions. As Will Rogers said, “The difference between death and taxes is death doesn’t get worse every time Congress meets.”