On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (“Tax Act”) into law which makes significant changes to the estate, gift, and generation skipping taxes.
The Tax Act doubles the estate, gift, and generation skipping tax exemptions to approximately $11.2 Million per person for 2018, which provides significant relief for high net worth individuals and families with valuable business interests. Unfortunately, this increased exemption is currently scheduled to sunset at the end of 2025. The sunset provision adds a layer of uncertainty, as no one can predict what will happen to the exemption in 2025 or beyond. In addition to the increase in the estate, gift, and generation skipping tax exemptions, the annual gift tax exclusion has been increased to $15,000 for 2018. Thus, in 2018, a donor can make gifts of up to $15,000 per beneficiary without eating into the donor’s $11.2 Million estate and gift tax exemption.
The estate tax provisions left untouched by the Tax Act are also significant in light of the increased exemption. The Tax Act maintains the “portability” of the estate tax exemption for married couples. Consequently, a surviving spouse can still use the deceased spouse’s unused exemption at the surviving spouse’s death, which effectively allows an exemption of $22.4 Million per couple for 2018. Notably, however, the generation skipping tax exemption remains non-portable between spouses. Thus, any generation skipping tax exemption left unused at a decedent’s death cannot be used later by a surviving spouse. Additionally, the Tax Act keeps the basis “step-up” at death. This step-up in basis allows the cost basis of assets included in a decedent’s estate to be adjusted to the fair market value of those assets as of the decedent’s death. Since, with the increased exemption, more assets can be included in a decedent’s estate without incurring estate tax, this basis step-up allows more assets to pass to younger generations without built-in capital gain.
How does all of this affect you? You should review your estate plan in light of these changes, as the Tax Act provides many new planning opportunities for both high net worth families and those with more modest assets. There is still some uncertainty about what will happen with the estate, gift, and generation skipping tax exemption after 2025 when the exemption reverts to pre-2018 levels. But individuals or married couples with net worth greater than approximately $10.0 Million (roughly the current exemption amount), should be especially sure their estate plan maximizes the wealth that can pass to younger generations free of estate and generation skipping taxes. For example, there are gifting techniques during life that can use the exemption while it is still high, if Congress does not make the exemption increases permanent before the 2025 sunset.
For individuals and families with net worth below the exemption amount, your current estate plan might be overly complex. There are now opportunities to simplify your plan to ensure assets are included in your estate and on the estate of the surviving spouse so that the basis of those assets can be adjusted at each death. Taking advantage of this step-up in basis and inclusion in the estate of the surviving spouse is increasingly important with such a high exemption amount. Depending on your asset picture, however, and whether or not your assets would have been taxable under the pre-2018 exemption, changes to your estate plan that would cause inclusion in your estate may need to be revisited before the 2025 sunset.
Other opportunities for maximizing the benefits of the Tax Act exist outside basic estate planning. For example, if you are a beneficiary of a trust that was created when there was a lower exemption amount, you should review the trust with an attorney. Depending on the structure of the trust, there may be opportunities to maximize the basis step-up of the trust assets on your death or possibly to terminate the trust. Such actions, however, should be done cautiously and with the advice of counsel to ensure no adverse generation skipping tax consequences are incurred as a result.
If you would like to discuss the implications of the Tax Act for you and your family please do not hesitate to reach out to our tax practice group leader, Robert G. Tweel, or any member of our Jackson Kelly team. We can help you analyze your particular situation to determine what changes, if any, make sense.