New Estate Tax Exemptions Impacting Your Estate Plan

Along with the modifications in the tax rates, recent changes to federal tax law through the 2017 Tax and Jobs Act signed into law also affect estate planning — especially those who have either high value estates, family farms, or other small privately-held businesses.

The Act, temporarily doubles the exemption amount for estate, gift, and generation-skipping taxes from the $5 million base, set in 2011, to a new $ 10 million base, good for tax years 2018 through 2025.  The “death tax” exemption is indexed for inflation, so it looks like an individual can shelter $11.2 million in assets from these taxes for 2018.  Another federal estate law provision called portability lets couples who do proper estate and financial planning double that exemption.  As such, a couple could exclude $22.4 million for 2018.  The Act’s sunset means that, absent further Congressional action, the exemption amount would revert to the $5 million base, indexed in 2025. 

In this window, the tax bill offers enormous planning opportunities for those high-asset estates.  For couples, this would benefit anyone with $11 million or more in assets.  Under current law, each person for 2018 had a $5.6 million exemption.  Now each person will have an $11.2 million exemption so, a couple has an extra $11.2 million to gift or transfer at death. 

Please keep in mind that the Act doesn’t make changes to the rules that step-up basis at death.  That means that when you die, your heirs’ cost basis in the assets you leave them are reset at the value when you die.

Far fewer estates will be subject to the “death tax.”  The Joint Committee on Taxation estimates the number of taxable estates would drop for 5,000 under current law to 1,800 under the new Act in 2018.  By comparison, 52,000 estates paid the tax in 2000 when the exemption was $675,000. 

Separately, the annual exclusion amount that an individual can give to any number of individuals without eating into the lifetime gift tax exemption is not changed by the new Act.  It will be $15,000 for 2018, an increase from $14,000 in 2017, due to indexing for inflation. 

In summary, the Act does not negatively impact most estate plans.  Instead, it does positively impact those estates that have higher-valued assets.  For example, this Act will prevent most family-owned businesses from having to take into consideration the significant financial impact that would occur if the estate tax is triggered. 

Other posts from the Harrison Law blog about Estate Planning can be found HERE and HERE.