Transfer Taxes And The Tax Act: An Overview And Three Possible Responses
Individuals and businesses continue to evaluate the Tax Cuts and Jobs Act of 2017 (the "Tax Act" or "Act") and, in particular, the specific effects on personal and business tax planning. Our clients are asking us daily how they should respond to the changes in law. In a prior newsletter, we summarized the Tax Act more generally and addressed the various aspects of personal, business, and estate tax planning affected by the provisions of the Act. In this article, we will address more specifically the provisions of the Act affecting transfer taxes - estate, gift, and generation-skipping. In addition, we will propose three specific responses to the question, "So what do I do (or not do) now with my estate plan?"
The Tax Act significantly alters the transfer tax exemption amounts of persons dying or making gratuitous transfers after December 31, 2017. Effective January 1, 2018, the gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption amounts have increased to an inflation-adjusted $10 million per individual or $20 million for married couples. The final determination amounts have been calculated by the IRS to be $11.18 million and $22.36 million, respectively, for tax year 2018. For some perspective, in 2017 each individual had an estate and gift tax exemption and a GST exemption of $5.49 million. Thus, the Act effectively doubles the amount of assets that a US citizen or permanent resident may transfer free from federal transfer tax.
But do not abandon your estate planning just yet - the federal estate tax is still in effect, and the elevated exemptions set out in the Act are prescribed to revert back to the lower, pre-Act amounts as of January 1, 2026.
Before addressing specific planning responses the Act, we should take a moment to provide a refresher course on federal transfer taxes.
The federal estate tax is a 40% tax imposed on an individual's assets which are transferred upon death. The United States has had some version of a federal estate tax since 1916. The tax applies to the gross estate - all of a decedent's personally owned assets, no matter the character or value - passing upon death to most individual beneficiaries, trusts, and non-charitable entities. The federal government allows an unlimited marital deduction for transfers to a surviving spouse, and an unlimited charitable deduction for transfer to qualifying charitable organizations. In addition, estates may deduct from the federal taxable gross estate debts, funeral expenses, legal and administrative fees, and estate taxes paid to states. The taxable...
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