Most of the changes in the Tax Cut and Jobs Act, which became effective on January 1, 2018, relate to income taxes. However, the law includes important and significant changes that affect federal estate tax and gift tax as well. For now, those changes are only temporary, but they provide immediate opportunities for estate tax and gift tax savings for individuals and couples who take advantage of the new provisions while they are in effect.
The Federal Lifetime Transfer Tax Exclusion More Than Doubled For 2018
Federal law imposes taxes on asset transfers by taxing estates, gifts, and generation-skipping transfers (GSTs). However, there are important exclusions and exemptions, which are taken into account in estate and gift tax planning.
In 2017, the lifetime transfer tax exemption was $5.49 million for an individual and $10.98 million for a married couple. The new tax law more than doubled the exemption beginning in 2018. For this year, the lifetime exemption is $11.18 million for an individual and $22.36 million for a married couple. Those are more than double the 2017 exemptions. The amounts will increase annually for inflation. Transfers that exceed the exemptions are taxed at a 40% rate, the same as previously.
There’s a catch. The new transfer tax exemption is in effect only through 2025, unless Congress acts to extend the effective date. If Congress does not act, the exemption reverts to 2017 levels on January 1, 2026.
At the same time, the annual per person gift exclusion amount for individuals increased from $14,000 in 2017 to $15,000 beginning in 2018. For a married couple, the annual per person exclusion is now $30,000. This change was an inflation adjustment rather than part of the new tax law. Gifts in excess of the exclusion amounts count toward the annual lifetime exemption, as increased by the new tax law. As such, the increased lifetime exemptions provide new opportunities to make tax-exempt gifts.
The increases in the lifetime exemption and annual exclusion provide a unique — and possibly temporary — opportunity for many people to save taxes by modifying their gifting plans and estate plans. It is anticipated that the Treasury Department will issue guidance making it clear that using the increased exemption now will not put transfers at risk when (or if) the increases expire in 2025.
Estate Planning and Gift Planning Implications
There are many different ways to leverage the gift tax exclusion and lifetime tax exemption in an estate plan. What works best for an individual or married couple depends entirely on the specific financial and family circumstances. An estate plan and gift plan must take into account both tax and non-tax considerations as well. There is no one-size-fits-all approach for estate planning or gifting.
Given the significant changes in the transfer tax lifetime exemption and increase in the gift tax exclusion, you should review your estate plan with an attorney to ensure that it takes the new provisions into account, while still achieving your overall objectives. There may be changes that could be made to your plan to maximize your estate tax and gift tax savings under the new law.
For example, some wills and trusts include trust-funding provisions that are based on the exemption amount in effect on the date of your death. If your estate plan has this provision, and you die before the higher exemption expires in 2026, those trusts may be funded with significantly larger amounts than you anticipated when those documents were signed. In that case, reviewing your estate plan with your attorney is extremely important to ensure that your plan still achieves your goals.
In addition, a deceased spouse’s unused exclusion amount is still available to the surviving spouse. On account of the increased exclusion amount, spouses can now have a combined estate value up to $22.36 million at the survivor’s death and avoid paying estate tax. Sound estate planning can ensure that spouses take advantage of that opportunity.
Your gifting plan also should be reviewed to maximize tax savings within the new limits. With the increased lifetime transfer tax exemption, a married couple who previously utilized their entire exemption can now transfer an additional $11.38 million to their descendants in 2018 without paying federal gift tax. For an individual in the same situation, an additional $5.69 million can be transferred while the new higher exemption is available. Making gifts outright to children or grandchildren outright or in existing or new trusts are just some of the ways to take advantage of the new law while it is in effect.
Especially since the window of opportunity may be limited to the next eight years, making gifts sooner rather than later in advisable. While it’s possible that the new higher limit could be extended beyond 2025, no one can predict what Congress may decide to do when expiration of approaches.
Does the New Tax Law Provide Opportunities in Your Estate Plan or Gifting Plan?
The only way to know if you can take advantage of the provisions of the new tax law is to discuss your estate plan and gifting plan with an experienced estate planning attorney. Our attorneys at BRMM have been serving Michigan clients since the 1970s. We welcome the opportunity to review your estate and gifting plans and suggest opportunities that may be available under the new tax law provisions.
Located in Troy, Michigan, BRMM helps clients in the Tri-County area and throughout Michigan. We also assist clients with property and interests in Florida. In addition, we represent clients from other states with an interest in a Michigan estate or trust or who have an aging loved one living in Michigan.
Call us at (248) 213-9514 or complete our online form to set up a free initial consultation.