New tax laws went into effect at the beginning of 2018 that could greatly affect your estate plan. If you have not yet talked to an estate planning professional about how the laws impact you, do so now so that you can make any necessary changes. Please note that the new laws only apply to U.S. citizens and green card holders. If you are a non-resident non-citizen without a green card, talk to your estate planning professional about the different laws that apply to you.
Gift Tax Exemption Doubles
The first change made to the tax laws was doubling the gift tax exemption. This exemption allows you to make up to a certain amount of lifetime gifts before you pay taxes on the gift amounts. Lifetime gifts include any transfers you make to individuals where you do not receive anything in return. In 2017, the gift tax exemption was $5.49 million for individual taxpayers. The exemption has doubled starting in 2018 to $11.18 million for individual taxpayers and $22.36 million for spouses.
In addition, the IRS sets an annual exclusion amount for each year. You can make gifts to an individual up to the exclusion amount in a year without paying taxes on the gifts. The exclusion amount rose from $14,000 in 2017 to $15,000 in 2018. If you make gifts of more than $15,000 to a single person in 2018, you most likely will owe gift tax.
The same is true for the overall gift tax exemption: if you make gifts of more than $11.18 million in your lifetime to any recipients, you most likely will owe gift tax. Note, however, that the change in the gift tax law lasts only until the end of 2025. After that, barring any new laws, the exemption amount will return to $5.49 million. As discussed below, your estate could run into problems if you make large gifts and/or have a large estate, and you pass away in 2026 or later.
Estate Tax Exemption Doubles
Like the gift tax exemption, the estate tax exemption also doubled starting in January 2018 to $11.18 million for individual taxpayers and $22.36 million for spouses. The gift and estate tax exemptions are connected in that both your lifetime gifts and the value of your estate on your death count against the $11.18 million exemption limit. After your death, the IRS assesses taxes based on whether the total of your lifetime gifts and your estate value exceed $11.18 million.
As a result, if you make no gifts during your lifetime but have a $10 million estate, you will qualify for the exemption and not be taxed on the estate. You will qualify for the exemption if you make $5 million in lifetime gifts and have a $5 million estate on your death. If, however, you make $10 million in lifetime gifts and then have a $10 million estate, you will exceed the exemption and your estate will be taxed on the extra $8.82 million. Further, if you live past the year 2025 with these gifts and estate, you will owe even more taxes because the $11.18 million exemption will expire.
Because of the changes to the tax laws, you may need to adjust your lifetime giving and estate plans to accommodate the new exemptions. For example, you may no longer need the trust you created, or you may need to start a new trust, to minimize possible estate tax bills after you pass away. Consult an experienced estate planning attorney to learn more.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience and her certification as a California estate planning and probate specialist by the California State Bar Board of Legal Specialization will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.