While recent tax reform signed into law in December 2017, more commonly know as the Tax Cuts and Jobs Act (TJCA), included a number of significant changes. One of the most notable changes for those of us with complex estate planning issues was the doubling of the federal estate tax exemption amount.
With the increased exemption amounts come additional opportunities to leverage opportunities for greater lifetime gifting for those that are subject to the new estate tax framework.
The Exemption By the Numbers
In 2017, the federal estate tax, gift tax and generation-skipping transfer (GST) tax exemption was $5,490,000 for individual taxpayers and $10,980,000 for married taxpayers. In 2018, under the new law, those amounts have jumped to $11,200,000 for individuals and $22,400,000 for married couples. These amounts are scheduled to be indexed for inflation each year until 2025. At that point, the federal estate tax exemption amounts will revert to 2017 levels adjusted for inflation unless Congress takes further action.
Understanding the Unified Exemption
The unified estate, gift and GST exemption is a lifetime exemption amount, meaning that taxpayers can use the exemption for lifetime gifting. The remainder that has not been used for lifetime gifting can then be used as an estate tax exemption amount at death.
This exemption amount is on top of the annual gift tax exclusion amount, which is $15,000 per person for 2018 (doubled for married taxpayers.) Essentially, any gift over this annual exclusion amount would be a taxable gift for which the lifetime exclusion could be applied. In addition, gift payments made directly to medical or educational institutions on behalf of the beneficiary are also exempt from the lifetime exemption.
So, if John and Jane Doe gift $1,000,000 to their daughter in 2018, the first $30,000 is exempt from taxation under the annual exclusion allowance. The remaining $970,000 would come off of their lifetime estate, gift and GST exemption.
Potential Planning Opportunities
For taxpayers who may have used up a significant portion of their lifetime estate, gift and GST exemption already through lifetime gifts, the new higher exemption amounts create additional planning opportunities. Similarly, people with significant assets may want to use the exemption amount between now and 2025 for gifting, while the exemption is certain, before it reverts to 2017 numbers.
In fact, by using the new increased exemption amount, taxpayers can now remove millions of dollars from their taxable estates without having to pay gift taxes. Assets could be used to fund irrevocable trusts for children or grandchildren, to make outright gifts to loved ones, to create charitable lead trusts or other philanthropic planning vehicles, to fund life insurance policies, make sales to grantor trusts, and more. And, these types of gifts will also remove any future appreciation on those assets from your estate.
For taxpayers who live in states with state estate taxes, taking advantage of this increase in federal gifting opportunities can also lower the amount that will be owed to the state at death.
Finally, taxpayers whose estate planning documents included credit shelter trust provisions (also called bypass or A/B trusts) may benefit from revisiting those documents, as there may be income tax planning advantages and opportunities for surviving spouses by changing that framework.
Talk to Your Tax Professional about Your Situation
As with other areas of tax law, the federal estate tax exemption can be complicated. The best way to evaluate how the new tax law might impact your own situation, or to identify potential planning opportunities, is to contact us or download your guide to tax reform. .