The Tax Cuts and Jobs Act (TCJA) reduces individual and corporate tax rates, eliminates a bevy of deductions and makes a host of changes to how Americans can preserve their wealth. Although the act falls short of repealing the death tax, it doubles the amount an individual may transfer tax free, either in his or her lifetime or at death.
Effective January 1, 2018 (and expiring December 31, 2025), the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption amounts double from an inflation-adjusted $5 million to $10 million.
Taking into account inflationary adjustments, the actual amount for these exemptions is expected to be $11.2 million for an individual or $22.4 million for a married couple in 2018. Both exemptions will continue to increase with inflation. Both will also revert back to their current levels at the start of 2026. (Congress could also lower the exemptions before then.)
Don’t get complacent and ignore estate planning because of the higher exemptions. Estate planning isn’t just about taxes. You want a plan that’s flexible enough to protect surviving spouses, minor children and special needs beneficiaries.
The increases present several opportunities for high-net worth individuals to consider:
- The higher exemptions may shield many families from estate taxes entirely, allowing them to simplify their planning strategies.
- Individuals who have already made gifts using the full lifetime exemption now have an opportunity to make additional gifts.
- Individuals may want to take advantage of the increased GST exemption to create GST-exempt trusts. Those with existing trusts subject to the GST tax may want to consider early distributions.
- It makes sense to review old life insurance trusts intended to pay an estate tax, and determine if the plan still makes sense or if it should be modified for other asset protection.
- If you don’t want to adjust your gifts now, consider updating your durable powers of attorney to include a gift provision. If you became incapacitated, that would allow your agent to leverage the new exemptions.
Other elements of the changes
Here are some other important planning-related factors:
Dated formulas: Estate plans should be reviewed immediately if trusts are funded using a formula linked to the estate tax or GST exemptions. For someone who dies before 2026, these trusts may be funded more than intended, to the detriment of the surviving spouse.
Conflicts with state law: There’s a growing difference between the federal tax exemptions and similar exemptions afforded under the laws of 15 states and the District of Columbia. It’s unknown how states will respond to the tax changes, so existing estate planning strategies may still be relevant.
Special situations: Don’t get complacent and ignore estate planning because of the higher exemptions. Estate planning isn’t just about taxes. You want a plan that’s flexible enough to protect surviving spouses, minor children and special needs beneficiaries. Other planning nuances may include profligate beneficiaries, asset protection from beneficiaries’ creditors or ex-spouses, family business succession, and more. Consult an estate planning attorney for guidance.
Although the act falls short of repealing the death tax, it doubles the amount an individual may transfer tax free, either in his or her lifetime or at death.