The new law doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption, creating new estate planning opportunities to consider.
For 2018, the exemption is as follows:
It will be adjusted for inflation each year after 2018.
The gift and estate tax exemptions remain unified so any use of the gift tax exemption during the taxpayer’s lifetime would decrease the estate tax exemption available at death. The tax rate for all three taxes remains at 40%.
Taxpayers with estates valued at more than $6 million and married couples with estates valued at more than $12 million will have four major factors to consider.
Married taxpayers with estates between $10 million and $24 million will typically have an estate plan that includes a provision in the living trust to fund a so-called bypass trust. This trust would utilize the remaining lifetime exemption of the deceased spouse, while giving the surviving spouse access to funds from it. When the surviving spouse passes away, the assets of the bypass trust won’t be includible in the surviving spouse’s estate. With the doubling of the estate tax, married taxpayers may want to consider including a provision in their revocable trusts or wills that would give them the flexibility to leave their assets to a trust that qualifies for the marital deduction and use portability to have the entire estate taxed in the surviving spouse’s estate, thereby getting a second basis set up for all assets when the surviving spouse dies.
Taxpayers with estates over $6 million and married couples with estates over $12 million must remember that the exemption amount is set to revert to 2017 levels after 2025. This means you have roughly seven more years to utilize the increased exemption.
Because the exemptions are scheduled to revert to their previous levels in 2026, this raises possible—yet unlikely—claw-back concerns that should be considered. There’s also no guarantee that a future administration won’t reduce the exemption amounts even lower.
It’s important to understand the drawbacks associated with gifting assets. Gifted assets don’t receive a step-up in tax basis. This step-up is valuable for low-basis assets that depreciate or will be sold. By keeping them as part of an estate, these assets will receive a step-up.
Most states conform to federal basis provisions. With state income taxes no longer deductible, taxpayers in high-taxed states such as California could see their federal and marginal tax rates be as high as 50%. The estate tax rate is 40%. Note that there might be an incentive to pay 40% estate tax rate to receive a 50% benefit.
With income and estate taxes seemingly in constant flux, providing flexibility in an estate plan could prove vital.
The increased exemption amounts are projected to reduce the number of estates subject to this tax to around 2,000, down from approximately 5,000. While the increased exemption amounts may change the way individuals and families plan their estates, there are still many nontax issues to consider, such as asset protection, guardianship of minor children, family business succession, and planning for loved ones with special needs.
It also isn’t clear how states will respond to the federal tax law changes. If someone lives in a state that imposes its own significant estate tax, many traditional tax-reduction strategies will continue to be relevant on a state level.