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| Helena S. Mock, Esq. |
As most of you know, the Tax Cuts
and Jobs Act (TCJA) signed into law at the end of 2017 made extensive changes
to the tax laws that will affect almost all Americans beginning in 2018. One of those changes will result in many
fewer estates being subject to the 40% estate tax, and larger estates owing
less tax.
Before the TCJA, the first $5
million (as adjusted for inflation in years after 2011) of transferred property
was exempt from estate and gift tax. For estates of decedents dying and gifts
made in 2018, this “basic exclusion amount” as adjusted for inflation would
have been $5.6 million, or $11.2 million for a married couple with proper
planning and estate administration allowing the unused portion of a deceased
spouse's exclusion to be added to that of the surviving spouse (known as
“portability”).
The new law, however, temporarily
doubles the amount that can be excluded from these transfer taxes. For
decedents dying and gifts made from 2018 through 2025, the TCJA doubles the
base estate and gift tax exemption amount from $5 million to $10 million.
Indexing for post-2011 inflation, brings this amount to approximately $11.2
million for 2018 ($22.4 million per married couple).
As a result of the large estate tax
exemption amount, many estates no longer need to be concerned with the federal
estate tax. Much of the planning done
prior to 2011, and even many done since then, centered on estate tax avoidance
but completely ignored minimizing income tax. But with so few estates now being
subject to estate tax, planning for such estates can be devoted almost
exclusively to saving income taxes. While saving both income and transfer taxes
has always been a goal of estate planning, it was more difficult to succeed at
both when the estate and gift tax exemption level was much lower. Below are
some tax planning strategies you may want to revisit in light of the larger
exemption amount and other recent changes in the law.
Gifts that use the annual gift tax
exclusion are one example. One of the benefits of using the gift tax annual
exclusion to make transfers during life is to save estate tax. This is because
both the transferred assets and any post-transfer appreciation generated on the
gifted assets are removed from the donor's estate. However, because the estate
tax exemption amount is so large, estate tax savings may no longer be necessary.
Making an annual exclusion transfer of appreciated property carries a potential
income tax cost because the person receiving the gift receives the donor's
basis upon transfer. Thus, the recipient could face an income tax liability (a
capital gains tax) if the gifted property were later sold. If there is no
concern the donor’s estate will be subject to estate tax, then the donor must
consider whether it is wise to make the gift now or wait and leave the property
to the individual at death because appreciated property which passes to a
beneficiary at death will get a step-up in basis that will wipe out the capital
gains tax on any appreciation occurring between the date the property was
acquired and the date of death.
No longer is it necessary to engage
in complicated planning to equalize the estates of both spouses so that each can
take advantage of the estate tax exemption amount. Generally, a two-trust plan
(generally referred to as a credit shelter (bypass, family, residuary, etc.)
trust and marital trust) was established to minimize estate tax. “Portability,”
or the ability to apply the decedent's unused exclusion amount to the surviving
spouse's transfers during life and at death, became effective for estates of
decedents dying after 2010, but the concept wasn’t made permanent until 2013.
As long as the election is made, portability allows the surviving spouse to
apply the unused portion of a decedent's applicable exclusion amount (the
deceased spousal unused exclusion (DSUE) amount) as calculated in the year of
the decedent's death. The portability election gives married couples more
flexibility in deciding how to use their exclusion amounts.
Estate exclusion or valuation
discounts that do not preserve the step-up in basis may no longer be desirable
given the excessive exemption amount. Some strategies previously used to avoid
inclusion of property in the estate may no longer be worth pursuing. Instead, it may be better to have the
property included in the estate or have the property not qualify for valuation
discounts so that the property receives a step-up in basis, or a larger (new)
basis at death. The gap between the transfer tax rate and the capital gains tax
rate has narrowed, making strategies that do not preserve the step-up in basis
less desirable.
For all of these reasons, and many
more which are not discussed here, if your estate plan has not been updated
since 2013, it merits review. The
increased exclusion amount may have an impact on your plan. Whether you should make any changes depends
on your individual goals and circumstances.
