For individuals considering their financial legacy, several provisions of the Tax Cuts and Jobs Act (TCJA) unlock new estate planning and gifting opportunities.
Under the TCJA, the maximum federal estate tax of 40 percent remains in place, but starting in 2018, married couples can exempt up to $22.4 million – a twofold increase from prior years. This joint exemption amount will be adjusted annually for inflation through December 31, 2025, when these provisions will sunset to half the exemption in place in 2025 without additional legislative action.
Given the temporary nature of these provisions, individuals should consult with their advisors to assess tax reform’s impact on their personal estate plans and consider the below activities to maximize potential benefits.
Review Estate Plan Documents
Periodic review of estate planning documents, like wills and trust documents, is a standard best practice, but tax reform makes the review even more essential. Between the scheduled federal sunset and the potential for changes on the state level, estate planning documents should be flexible and allow tax-planning adjustments and decisions to be made after a spouse’s death.
Increase Gifting to Family Members and Trusts
Operating under the assumption that the federal estate tax exemption will revert back to the pre-tax reform level of $5.49 million after 2025, individuals have a limited but significant opportunity to make large, estate tax-free gifts to family members, either directly or into trusts, between 2018 and 2025 when the exemption is doubled to $11.2 million (annually adjusted for inflation).
The doubling of the exemption provides a unique chance for high net worth individuals to remove more of their assets from their taxable estate, particularly when coupled with other discounting techniques.
Lifetime Gifts and Generation-Skipping Transfers
The generation-skipping transfer (GST) exemption is linked to the lifetime estate tax exemption, which doubled under tax reform. This could provide taxpayers with several opportunities to maximize GST, such as:
- Revisiting irrevocable trusts that previously faced GST-related issues and consider making a late allocation of GST-exempt funds, where appropriate.
- Making additional $5 million irrevocable GST gifts, which shifts future appreciation and locks in use of the increased exclusion.
Keep in mind that portability of a deceased spouse’s unused exemption remains in effect and the step-up in basis on inherited property is unchanged.
Although the increased exemption will greatly reduce the number of estates subject to transfer tax, there are still many considerations that make estate planning important, like asset preservation, family business succession, guardianship of minor children and providing for family members with special needs.
The estate planning professionals at RKL can help you take a proactive and holistic approach to preserving your financial legacy, so contact us today to get started.
Visit our Tax Reform Resource Center for more insights, context and answers on the impact of the Tax Cuts and Jobs Act of 2017.