Within the recently enacted Tax Cuts and Jobs Act (the “Act”), lawmakers failed to satisfy longstanding promises of a full repeal of the federal estate tax. The Act does, however, significantly increase the amount of wealth that taxpayers can transfer on a tax-free basis during their lifetimes and at death. For now, anyway.
For decedents who pass away after 2017 but before 2026, and for lifetime gifts made during this timeframe, the federal estate and gift tax exemption amount has been increased from $5 million to $10 million, indexed annually for inflation from 2011. The adjusted exemption for individuals in 2018 has been set at $11.18 million and at $22.36 million for married couples. The generation-skipping transfer tax (“GST”), which is levied on transfers made to recipients who are two or more generations younger than the donor, has also been increased from $5 million to $10 million per person ($20 million per married couple), again adjusted for inflation as above. Maximum tax rates for estate, gift and GST taxes remain at 40%.
The Act also leaves untouched several important estate planning tools frequently utilized by taxpayers. Portability, which permits a surviving spouse to claim the unused portion of a deceased spouse’s estate tax exemption, remains available for the indefinite future. In addition, the gift tax annual exclusion, which allows taxpayers to make certain lifetime gifts without incurring gift tax or reducing the gift tax exclusion, is unaffected by the legislation, and has been increased to $15,000 per person per donee in 2018. Assets inherited from a decedent will continue to receive a step-up in basis to the value on the date of death.
Unless Congress takes further action, the increased estate, gift and GST exemption amounts will sunset at the end of 2025. This means that for decedents who die in 2026 or later, or for lifetime transfers made after the end of 2025, the exemptions will revert back to pre-2018 levels, adjusted for inflation.
Any change in the law of this magnitude presents opportunities and pitfalls. Taxpayers are strongly encouraged to consult with their estate planning advisors to determine the impact the legislation will have on their existing estate plans.