Estate and gift tax planning are among the many areas of tax law impacted by the Tax Cuts and Jobs Act, which takes effect on January 1, 2018.
Federal Tax Law Changes
Through December 31, 2017, each person had an exemption of up to $5.49 million against federal gift, estate or generation-skipping transfer taxes. Spouses could transfer a total of $10.98 million. Transfers in excess of the exemption were subject to tax at a rate of 40 percent.
Beginning with gifts or deaths on or after January 1, 2018, the Act doubles the exemption amount to approximately $11.2 million per person, adjusted annually for inflation, or $22.4 million for spouses. The increased exemption expires at the end of 2025. The 40 percent tax rate continues to apply to transfers in excess of the exemption amount.
The “portability” of a deceased spouse’s unused exclusion amount is still available to a surviving spouse, meaning spouses with a combined estate up to approximately $22.4 million in value at the time of the survivor’s death will not pay estate tax with the proper planning and estate tax return elections.
Beginning on January 1, 2026, the exemptions revert to the current $5 million exemption (still indexed for inflation) unless Congress acts to extend them. Regulations will confirm that gifts made during this period (2018-2025) up to the increased exemption amounts will not later be subject to tax if the exemptions are reduced, (i.e., no “clawback”).
The basis step-up rules, adjusting the basis of any asset passing from a decedent to the fair market value of that asset as of the decedent’s date of death, continue to apply.
Also, in 2018, the annual gift tax exclusion increases to $15,000 (a married couple may make gifts of $30,000 per recipient). This change is due to inflation and not the new legislation.
State Tax Law Changes
In states with independent estate taxes, the increased federal estate tax exemption could create an unintended state estate tax liability, unless your estate plan is amended. In addition to the federal changes, possible changes in state laws should also be monitored. As a result of the difference between federal and state exemptions, and the lack of "portability" for state laws (unlike federal law), it is necessary to properly structure the estate plans of married residents of these states to maximize the use of the state exemption and the marital deduction. Clients who live in, or own property in, the following states, among others, should be cognizant of pending or potential changes in state laws:
New York
New York has no gift tax. The New York estate tax exemption continues to be $5.25 million, increasing for decedents dying on or after January 1, 2019. The amount of the 2019 exemption is not yet known, but was supposed to be the federal amount (before the Act changed that amount). The maximum tax rate is 16 percent. However, the estate tax “cliff” eliminates the benefit of the exemption for estates exceeding the exemption amount by more than 5 percent.
New Jersey
New Jersey has no gift tax and had a $2 million exemption from estate tax in 2017. Beginning January 1, 2018, the New Jersey estate tax is repealed. It is quite possible that the estate tax will be reinstated in 2018, given the political realities, but the amount of the exemption is unknown. New Jersey’s inheritance tax continues to apply to transfers outside of the decedent’s immediate family.
Planning Considerations
Review Your Estate Plan
In light of the significant changes to the estate tax, your estate plan should be reviewed to ensure that it still accomplishes your objectives. This includes your Will, as well as lifetime tax planning strategies that may be in existence. The federal tax law changes are scheduled to expire after 8 years, and it is possible that significant changes could occur sooner. Further, some states may change their tax laws. Therefore, estate planning documents should be flexible, including allowing for tax planning decisions to be made after the first spouse’s death, such as using disclaimer trusts, QTIP trusts and Clayton-type trusts.
Gifting
The increased gift tax exemption provides an opportunity for clients to make significant gifts. Gifts avoid estate tax on future appreciation and, in many cases, state estate taxes on the entire value of the gifted property. With only a window of opportunity under the Act (and uncertainty as to future changes in the law), gifts should be made sooner rather than later. However, keep in mind that gifted assets will not receive a basis adjustment at your death.
Income Tax Focus
If you are no longer likely to have a taxable estate due to the increased exemption, consider changing your estate plan to achieving a step-up in basis for income tax purposes to fair market value at your death on assets that have appreciated.
Change of Domicile
If you are considering changing your domicile, please discuss with us the possible income, estate, gift and generation skipping transfer tax effects of such a change, and the necessary steps to complete such a change.
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