The Tax Cuts and Jobs Act (TCJA) represents the most comprehensive reform of the U.S. tax code in over thirty years and includes significant changes which will likely impact your estate plan. Some of the significant changes include the following:
Exemptions Amounts Doubled: The TCJA doubles the federal estate, gift, and generation-skipping transfer (GST) tax exemptions from $5 million to $10 million per individual, with additional inflation adjustments. The IRS has not yet released the exemption amounts for 2018 with the inflation adjustment. It is anticipated that the estate, gift, and GST tax exemptions for 2018 will be between $11.18 and $11.2 million for individuals and $22.36 and $22.4 million for married couples.
However, the increased exemption amounts are temporary – they will sunset (or expire) on December 31, 2025, at which time the exemptions will revert to the prior $5 million per individual, plus the relevant inflation adjustments, unless Congress acts to extend it.
Tax Rates and Step-Up in Basis at Death Unchanged: The TCJA does not change the federal estate, gift, and GST tax rates. The highest marginal federal estate and gift tax rates will remain at 40% and the GST tax rate will remain a flat 40%. Further, the TCJA does not change the ability to obtain a step-up in basis of assets at death. The cost basis of assets received from a decedent is the fair market value of the asset on the date of the decedent’s death and not his or her cost basis. Gifts made during life do not receive a step-up in basis but instead the cost basis of the gift is the same as the donor’s cost basis.
Annual Gift Amount Increased: For 2018, the annual gift tax exclusion amount for gifts to individuals increased from $14,000 to $15,000. This change is due to inflation and not the TCJA.
In light of these significant changes, your estate plan should be reviewed to ensure that it still accomplishes your objectives. You may want to simplify your existing estate plan due to the increased exemption amounts. If you are no longer likely to have a taxable estate, married couples may consider changing the focus of your estate plan from federal estate tax planning to federal income tax planning to maximize the step-up in cost basis. If you have a family trust or credit shelter trust established at the death of your spouse, you may consider options to revise the trust so that the assets can receive a step-up in basis at your death.
You may want to take advantage of the increased tax exemptions by making gifts of your assets now and avoid federal estate tax on future appreciation. Any significant gifts should be made sooner rather than later because there is only a window of opportunity under the TCJA.
It is important to keep in mind that some of the significant changes to the U.S. tax code under the TCJA are not permanent and are scheduled to expire in eight years. Your estate plan should be flexible. Please speak with an attorney at our office to determine how best to take advantage of the increased exemption amounts or plan for its possible sunset to ensure your estate plan is coordinated with these significant changes.