Massive Changes to the Estate and Gift Tax Under the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) made substantial changes to the estate and gift tax exemption. Beginning in 2018, fewer estates will be subject to the 40% tax, and larger estates will likely owe less tax.
Before the TCJA, the first $5 million (as adjusted for inflation in years after 2011) of transferred property was exempt from estate and gift tax. For individuals who have passed and/or made gifts in 2018, this “basic exclusion amount” as adjusted for inflation would have been $5.6 million. For a married couple that went through proper planning and estate administration, this amount would have been $11.2 million − the unused portion of a deceased spouse’s exclusion would have been added to that of the surviving spouse, also known as “portability”.
The new law temporarily doubles the amount that can be excluded from these transfer taxes. For individuals who have passed and/or gifts made from 2018 through 2025, the TCJA doubles the base estate and gift tax exemption amount from $5 million to $10 million. Indexing for post-2011 inflation, this amounts to approximately $11.2 million for 2018, and $22.4 million per married couple, with some basic portability techniques.
The annual gift tax exclusion remains in place under the TCJA, and is increased for inflation to $15,000 per recipient for the calendar year 2018. Spouses who consent to split their gifts will be allowed to transfer a total of $30,000 per recipient in 2018. One of the benefits of using the gift tax annual exclusion to make transfers during life is to save estate tax. However, because the estate tax exemption amount is so large, estate tax savings may no longer be an issue.
The step-up in basis rule will also remain unchanged by the TCJA, meaning an heir’s tax basis in inherited property that has appreciated will be “stepped-up” to the fair market value as of the decedent’s date of death. A beneficiary is able to wipe out the capital gains tax on any pre-death appreciation in the value of the property under this rule.
A related transfer tax called the generation-skipping transfer (GST) tax is designed to prevent avoidance of estate and gift taxes by skipping transfers to the next successive generation. The TCJA doesn’t specifically mention generation-skipping transfers, but since the GST exemption amount is based on the basic exclusion amount, generation-skipping transfers will also benefit from the post-2017 increased exclusion.
This increased exclusion amount may have an impact on your current estate plan and cause you to consider the need to redraft some important documents, including wills and trusts.
Before making any final decisions, we always recommend that you consult with your tax advisor to review options based on your situation. Please contact us if you have any questions as you navigate 2018 tax planning.