Written by: Patrick Doyle, Staff Accountant
The impact of the tax reform bill, otherwise known as the Tax Cuts and Jobs Act (“TCJA”) which passed at the end of 2017, has yet to be felt by most taxpayers and their advisors. But make no mistake…the TCJA is the most dynamic federal tax legislation passed in the last 30 years. The new law’s provisions affect both business and individual taxpayers, with most changes taking effect for 2018 and expiring after 2025. And while most will eventually feel the impact of the law’s provisions on their business or personal income tax situations, I’d like to take this opportunity to highlight the TCJA’s changes to the U.S. Estate/Gift/GST transfer tax system.
To provide some background, transfer taxes are…surprise, surprise…a tax on your right to transfer property during life or at death. There are three different types of transfer taxes:
- Estate Tax – tax imposed on right to transfer property at death, assessed against the fair market value of a decedent’s assets less debts and applicable expenses of estate administration. The rate is 40%.
- Gift Tax - tax imposed on right to transfer property during life, assessed against the fair market value of the transferred property. The rate is 40%.
- Generation-Skipping Tax (“GST”) – additional tax imposed on both transfers during life and at death to persons (or a trust for the benefit of persons) two generations or more removed from the donor during life or decedent at death. The GST was enacted to catch transfers that were escaping gift and estate tax at the 1st generation i.e. grandparents gift to grandchildren, property escapes estate tax at both grandparents’ and parents’ level. The rate is also 40%
In an effort to mitigate the effect of transfer taxes on a socioeconomic level, since inception, the government put exemptions in place to keep most Americans from being subject to these aforementioned transfer taxes. Before the TCJA, the first $5,000,000 (as adjusted for inflation in years after 2011) of transferred property was exempt from estate and gift tax. For estates of decedent’s dying and gifts made in 2018, this “basic exclusion amount” as adjusted for inflation would have been $5,600,000, or $11,200,000 for a married couple with proper estate planning and a particular tax election made, known as “portability”.
The new law under TCJA temporarily doubles the amount that can be excluded from these transfer taxes. For decedent’s dying and gifts made from 2018 through 2025, the TCJA doubles the base estate and gift tax exemption amount from $5,000,000 to $10,000,000 per person. Indexed for post-2011 inflation, in 2018 that basic exclusion amount is approximately $11,200,000 per person ($22,400,000 for a married couple with portability election). And while language in the TCJA does not mention generation-skipping transfers specifically, because the GST exemption is based on the basic exclusion amount, those transfers will also see an increased exclusion amount equal to the increase in the estate and gift tax exclusion amounts.
These increased exemption amounts are unprecedented and may provide an opportunity for some advanced estate planning to benefit and protect your family’s wealth and legacy. At the very least, it should cause you to take a look at your current estate planning documents (i.e. wills, trusts, beneficiary designations).
Please call me if you would like to discuss how the law change may affect your particular situation, and the planning steps you might consider now or sometime in the near future.