The Tax Cuts and Jobs Act’s (TCJA’s) significant changes to income taxes have received a lot of attention, and with good reason. The new law also altered gift and estate taxes in a significant way. Though the TCJA didn’t revoke these taxes, it did drastically reduce the number of taxpayers who will be impacted by them, at least for the next few years. Regardless, factoring these taxes into your estate planning is an important task to complete.
The changes made to the TCJA more than doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption. It climbs from $5.49 million in 2017 to $11.18 million in 2018.
This amount will continue to be adjusted annually for inflation through 2025. However, the exemptions will revert back to their 2017 levels (adjusted for inflation) for 2026 and beyond, without any further Congressional action.
The rate for all three of the taxes remains at 40%, which is only three percentage points greater than the highest income tax rate.
Even before the TCJA was passed, most taxpayers didn’t have many concerns about the federal gift and estate taxes. While the TCJA protects even more taxpayers from these taxes, those with estates around the $6 million to $11 million range (twice that amount for married couples) still need to keep in mind the possible post-2025 estate tax liability in their estate planning. Their estates would escape the estate taxes if they were to pass away while the doubled exemption is in effect, but they could still be subject to the taxes if they live beyond 2025.
Those taxpayers who could be subject to gift and estate taxes after 2025 should look to consider making gifts now in order to take advantage of the higher exemptions while they’re accessible.
If you live in a state with an estate tax, then factoring taxes into your estate planning is essential. Even prior to the TCJA, many states imposed an estate tax at a lesser threshold than the federal government did. With the TCJA, the differences in some states will be even larger.
Income tax planning became more important in estate planning when exemptions rose to $5 million over 15 years ago. Now, it is an even more important part of estate planning.
For example, holding assets until death may be advantageous if estate taxes aren’t a concern. When you give away an appreciated asset, the recipient takes over your tax basis in the asset, which activates capital gains tax if the recipient were to sell it. However, when an appreciated asset is inherited, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, which removes the built-in capital gain. Therefore, retaining appreciating assets until death can save substantial income tax.
Review your estate plan
Whether or not you need to be worried about federal gift and estate taxes, establishing an estate plan and going over it regularly is imperative. Contact your Faw Casson team to review the potential tax impact of the TCJA on your estate plan.