This year, new tax legislation—perhaps the most significant in over 30 years—went into effect. The new legislation markedly alters the tax laws for both individuals and businesses, including some of the estate, gift, and generation-skipping transfer tax provisions.
The new law did not eliminate the estate, gift, or generation-skipping transfer (GST) taxes, nor did it dramatically alter how these taxes work: the 40% rate, marital deduction, portability, annual exclusion, and lifetime exemption are still around. But the new law did increase some of the exemption and exclusion amounts.
Most significantly, the new law doubled the lifetime exemption, i.e., the amount each of us can transfer during our lives or upon our deaths before we have to pay estate or gift tax. The GST tax exemption amount also doubled. For 2018, the exemption amounts will be around $11.2 million.* However, unfortunately, the increased exemption amounts are temporary. They will revert back to their current levels in 2025—unless a change in the political tides reduces them sooner or makes them permanent.
The large but temporary exemption amounts have a couple of important implications:
- Individuals and couples who are likely to die with more than $5 million may benefit considerably from making substantial gifts before the exemption amounts revert. Techniques like GRATs, IDGTs, SLATs, FLPs and similar are helpful in leveraging exemption, i.e., transferring as much value as possible with the exemption available.
- Some estate planning documents need to be updated. Certain funding formulas in estates of less than $11 million may result in the surviving spouse not having sufficient access to funds. Those formulas may also result in state death taxes being incurred on the first spouse’s death (rather than deferred for the surviving spouse’s lifetime) or unnecessary capital gains tax.
In addition to the changes in the lifetime and GST tax exemptions, the new law creates a deduction for certain qualified business income, increases certain limits on charitable contributions, and expands the uses of 529 plans, among other changes.
This year also brings some new inflation-adjusted figures to familiar provisions of the tax code. For example, the gift tax annual exclusion amount for 2018 is $15,000 (up from $14,000 in 2017). Other inflation-adjusted amounts are available
All of these changes make 2018 a good year to evaluate whether your estate plan reflects your wishes and accomplishes your tax objectives. Please feel free to contact us to schedule a time to for such an evaluation.
*The official number has not yet been released by the IRS.