On January 1, 2018, the Tax Cuts and Jobs Act (TCJA) took effect in the United States. The most sweeping tax reform in decades, the TCJA has affected the tax burden of both businesses and individuals, often in a favorable way. One such impact is the temporary increase in the estate tax exemption.
What's changed? Quite a bit. For tax year 2017, individuals could claim an exemption of up to $5.49 million against federal gift, estate, and generation-skipping transfer taxes. For a married couple, the exemption amount was $10.98 million dollars. What's more, if the first spouse to die did not use up all of his or her exemption, the remaining amount of estate tax exemption was portable, meaning it could be used by the second spouse. A Form 706 estate tax return would need to be filed for the deceased spouse's estate.
For 2018, and continuing through the end of 2025, the exemption amount is nearly doubled. The amount is $11.18 million for an individual in 2018, and $22.36 million dollars for a married couple. The option of portability that existed before the TCJA continues, meaning that through proper planning, a married couple can maximize their use of the exemption.
You'll note that the title of this blog post references a temporary change. That's because the increase in the exemption is due to "sunset" as of January 1, 2026, meaning that estate, gift, and generation-skipping transfer tax exemptions will return to their pre-2018 levels. While it is possible that Congress could vote to extend them, we need to assume at this time that the increased exemptions will go back to their previous levels. That means that while the increased exemptions are in place, there are some interesting opportunities and challenges for those interested in updating their estate plan and gifting to loved ones.
Consider your testamentary planning. If your will or other estate planning documents make bequests based on formulas which assumed exemption amounts from before the change in the law, the property transfers that result might not line up with what you originally had in mind. It's wise to speak with an experienced estate planning attorney to discuss how those bequests might best be reconfigured.
If you are considering making gifts, you might want to think about planning for those transfers as soon as possible. This will allow you to get maximum benefit out of the increased exemptions before that increase expires. Your attorney can help you to move appreciation and income on the assets you gift out of your estate. Be aware that the TCJA authorizes the U.S. Treasury to take measures to address differences between exemption amounts when a gift is made and at the time of death to avoid a situation in which a gift is subject to "clawback."
One way to take advantage of the temporarily increased exemption is by using some or all of your increased exemption amount to make tax-free gifts to loved ones during your lifetime. Let's say you have real estate worth $7 million that you want to pass on to your adult child. With the increased exemption amounts currently in place, your attorney could help you transfer that property, and any appreciation in subsequent years, out of your estate. If you were to pass away in ten years, when the exemption has reverted back to pre-TCJA levels, and your child inherited the property, the amount exceeding the exemption would be subject to estate tax.
By gifting the property while the exemption is increased, that outcome is avoided. However, there are other considerations to take into account. For instance, if you gift the property in 2018, rather than your child inheriting it in ten or twenty years, your child will not get the benefit of a stepped-up basis in the property. That could minimize or even negate the benefit of avoiding estate tax. An experienced attorney can help you understand all the implications of the actions you might take to benefit from the TCJA's provisions
Admittedly, even before the TCJA was enacted, a very small percentage of Americans had estates that were subject to the estate tax. With the law in place, that number has shrunk even further. Even if your estate doesn't consist of millions of dollars, it is still worth it for you to be aware of changes in the law and keep your estate plan updated—avoiding taxes isn't the only reason to have an estate plan!
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