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The Tax Cuts and Jobs Act of 2017 (Tax Act) substantially increases the exemption amounts for the estate, gift, and generation-skipping transfer (GST) taxes. The Tax Act also retains the income tax basis adjustment on death. This is commonly referred to as the “basis step-up,” although the adjustment may increase or decrease the tax cost basis of a particular asset depending on the asset’s date-of-death value.
The following provides a summary of the changes to the gift, estate, and GST taxes:
- Exemptions: The Tax Act doubles the estate, gift, and GST tax exemptions, effective for decedents dying after December 31, 2017, and before January 1, 2026. This means that the exemption amount for estate, gift, and GST tax is approximately $11,200,000 per person. The exemption amount will be adjusted annually for inflation. The tax rate remains at 40% on the value of assets in excess of the exemption.
- Annual Exclusion: The Tax Act makes no changes to the annual exclusion for gift and GST tax. The exclusion increases to $15,000 in 2018 because of inflation and will continue to be adjusted annually for inflation.
- Portability: Portability of a decedent’s unused estate tax exemption amount to a surviving spouse is still available.
What Does This Mean for Your Plan?
As a result of these changes, a married couple will now have approximately $22.4 million in estate tax exemption. For some clients, this may result in a simplification of their estate plan; others will need to make significant revisions to ensure that the funding of trusts created at death is consistent with their plan. This is particularly true if their revocable trust relies on the use of marital or GST funding formulas to create trusts at the first or second death. For married couples, if your plan contains substantial differences between what happens to the “marital share” and the “bypass share” at the death of the first spouse, or if your plan creates lifetime GST-exempt trusts for your descendants at your death, it is important that you contact your attorney to review your plan and implement any desired changes.
Future Gifting Considerations
The increase in the gift tax exemption may also make significant lifetime gifts an attractive planning opportunity for some clients. For other clients, this opportunity will be more complicated, because an asset gifted during the donor’s life carries with it the donor’s cost basis rather than the stepped-up income tax basis that the asset would receive if transferred at death. The possibility that the estate, gift, and generation-skipping tax exemptions may be reduced (either under a future Congress or President, or after 2025 when the increased exemption is scheduled to sunset) should also be considered. Your attorney can review your options with you and discuss the benefits and drawbacks of making lifetime gifts.
Qualified Tuition Plans
Changes have also been made to the use of funds held in 529 plans (qualified tuition plans). Withdrawal of up to $10,000 per year can now be made from 529 plans to pay for elementary and high school education expenses. In addition, taxpayers have the ability to roll these accounts into accounts under the Achieving Better Life Experience Act (ABLE) under certain scenarios.
2018 Summary of Changes to Income Tax for Individuals
2018 Summary of Changes to Income Tax for Corporations and Pass-Through Entities