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Any time there is a change to the federal tax code, as there was at the beginning of 2018, there is the potential for an impact on estate planning. Many people devise an estate plan with the intention of minimizing taxes, so it stands to reason that a change to the tax code might call for an update to your estate plan. At the very least, you should review your estate plan to see if an update is needed. It’s time to ask yourself whether you have to update your estate plan with the new tax law.
There are estate-related changes with the new tax law, known as the Tax Cuts and Jobs Act (TCJA). Fortunately, the changes are favorable to those seeking to avoid estate tax. The estate tax and gift tax exemption for tax year 2018 has increased to $11.2 million (from $5.49 million) for an individual, or $22.4 million for a married couple. The estate tax exemption is the amount subtracted from the gross value of your estate; any amount above and beyond the exemption is subject to estate tax. So the good news is, if the gross value of your estate is less than your exemption amount, it will not be subject to estate or generation-skipping transfer taxes.
Most people don’t have a gross estate that tops the exemption amount. But that doesn’t mean that there’s nothing else to think about with an estate plan. For one thing, these increased exemption amounts will “sunset” back to 2017 levels after tax year 2025. For another, estate planning is about much more than avoiding estate tax.
Gift Tax Annual Exclusion, Tax Basis, and the New Tax Law
As of tax year 2018, the annual gift tax exclusion will increase to $15,000 per individual from $14,000, which had been the amount for the past five years. This exclusion amount is the amount you can gift to any individual in a given year without reducing the available amount of the estate tax and gift tax exemption described above. The gift tax exclusion is for each individual to whom you make a gift, not your total gifts for the year. What’s more, if you team with your spouse, you can, as a couple, give each individual $30,000 without touching your lifetime exemption amount.
As of tax year 2018, the annual gift tax exclusion will increase to $15,000 per individual from $14,000, which had been the amount for the past five years.
For example, if you have three adult children, you and your spouse can give them each $30,000 in tax year 2018, for a total of $90,000. Those gifts are not subject to gift tax, nor do they reduce the amount of your lifetime exemption. If you wish to give each child $50,000, of course, you may; you would probably not have to pay gift tax, but the excess over the annual exclusion amount (i.e., $20,000 for a joint gift) would reduce your available lifetime exemption amount, and you would have to file a gift tax return.
We’ve discussed in previous blog posts the impact of stepped-up tax basis on estate planning and taxation. The changes wrought by the TCJA do not impact the laws regarding basis. If you leave real estate to an heir or beneficiary, whether through a will or a trust, they will inherit a stepped-up basis. In other words, their tax basis will be the fair market value of the property as of the date of your death, not your purchase price for the property. In the event your heir sells the property, this will mean a reduction in the capital gains tax they may have to pay.
Other Effects of the TCJA on Estate Planning
As mentioned above, many provisions of the TCJA will “sunset” at the end of tax year 2025, returning to the levels in place before the law was enacted. What happens to gifts made under increased exemption or exclusion levels in the meantime? Will they be subject to tax after 2025?
Fortunately, the answer is no; there will be no so-called “clawback” of taxes that might have been due. This provides individuals with a unique opportunity to make best use of the TCJA’s advantageous provisions. If there is a charitable organization you would like to support, now might be a good time to establish a charitable lead trust. To secure your family’s future, this time period might be right for establishing an irrevocable trust or pouring more funds into an irrevocable trust you have already established.
Remember, too, the caveat above: estate planning is about more than avoiding taxes. Don’t take an action that may (or may not) have a tax benefit if it will not fit into your overall planning goals. How do you know if an action will further your planning? Speak with your financial planner, accountant, and estate planning attorney. They will enable you to see the big picture and may present you with considerations, and planning options, that you had previously been unaware of. In addition, your estate planning attorney can help you plan for issues other than the transfer of assets, such as incapacity planning.
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