The Tax Cuts and Jobs Act signed into law by President Trump on December 22, 2017 represents the largest overhaul of the tax code since 1986. While the changes to individual income tax deductions and the corporate tax break dominated the news, there were also several major changes made to the estate and gift tax regime. The purpose of this article is to summarize these revisions.
The most notable change is the increase in the federal estate, gift and generation-skipping transfer (“GST”) tax exemption amounts from $5.6 million to an estimated $11.18 million per individual (indexed annually for inflation). Married individuals will now have separate estate, gift and GST tax exemption amounts of double the individual amounts (i.e., an estimated $22.36 million). At first glance, these new exemption amounts seem to indicate that very few individuals will need to concern themselves with the estate tax when evaluating their estate plan. However, these new provisions are set to sunset, or lapse, on December 31, 2025. Prior to that date or any earlier repeal, individuals and married couples can take advantage of these increased transfer tax exemption amounts to make gifts to beneficiaries (or to trusts for beneficiaries) completely tax free. In addition, allocation of GST tax exemption to previously GST tax non-exempt trusts before 2026 is certainly worth considering.
The annual gift tax exclusion amount has been increased from $14,000 per beneficiary to $15,000 per beneficiary in 2018. Now, a married couple can give up to $30,000 combined per beneficiary each year without utilizing any of the couple’s combined transfer tax exemption of an estimated $22.36 million.
The increased transfer tax exemption amounts create unique planning opportunities. They might render certain aspects of your estate plan unnecessary or inconsistent with your objectives. For some clients, especially those with estates below the former exemption amounts ($5.49 million per individual in 2017), income tax planning may be more important and beneficial now than estate tax planning. For example, a married couple may now transfer an estimated $22.36 million in assets and these assets can receive a full cost-basis step up with proper planning. This type of tax planning can result in substantial income tax savings for future beneficiaries, by wiping out capital gains taxes. An estate plan requires highly technical and specific language in order to take maximum advantage of this cost-basis step up, which was rarely utilized in the past due to the focus on estate tax avoidance. Similarly, the changes to individual income tax laws mean that some donors may see no income tax benefit for charitable gifts, and may want to consider re-tooling their gifting program to ensure that they are maximizing the tax benefits available.
Once the new transfer tax exemption provisions sunset, the exemption amounts are set to revert back to 2018 levels, subject to inflation adjustments, e.g., $5.6 million per individual, $11.2 million per couple, plus 8 years of inflation adjustments. Of course, a new administration could reduce the exemption amounts before December 31, 2025, or provide for either reduced or increased exemption amounts after the new provisions sunset. In light of this uncertainty, flexibility is key – no one can predict his or her date of death, but your estate plan should be flexible enough to take advantage of the estate, gift, GST and even income tax laws under current and future tax regimes. While the primary drivers of your estate plan will always be important non-tax objectives, you should carefully review your estate plan and continue to monitor ongoing developments in the tax code with your attorney to ensure that you and your family are receiving the maximum protections, benefits and savings available to you.