The Tax Cuts and Jobs Act was signed into law on December 22, 2017, and it continues to provide extraordinary opportunities for those who are planning for their estate. One of the most significant benefits gained through this Act was the temporary increases in exemptions on gift and estate taxes.
Changes in the Act
Currently, transfers of property that occur during one’s life or upon death in excess of the gift and estate tax exemption limit – which was $5,490,000 - are taxed at the federal rate of 40%. However, the Act doubled this exemption amount for a limited amount of time. Between January 1, 2018, and January 1, 2026, the federal estate, gift, and generation skipping transfer exemption amount is set at $11,180,000. This exemption limit is doubled for married couples.
This change means that individuals can leave a lot more of their wealth and assets to family members without incurring a tax rate of 40%. But it is crucial to understand that these exemption limits are only temporary; without another statutory change, the limits will revert to $5,490,000 after the January 1, 2026 deadline has passed.
Despite this, the IRS announced that individuals who use the exemption between 2018 and December 31, 2025, will not be adversely affected when the exemption reverts to its former level. They have determined that there would be no ‘clawback’ of gifts made by individuals during the defined period, even if the lifetime exemption amount is subsequently decreased.
There were no changes to the provisions that allow gifts of any amount for health care or education to be excluded from the gift tax. These payments must be made directly to the educational institution or medical provider, though.
Benefits of Estate Planning Now
Due to the changes made in the Act, estate planning activities, and asset transfers that occur during this time can be incredibly advantageous for families who are trying to keep more of their assets. And it is far better to consider taking action sooner rather than later to ensure that securing these benefits isn’t put into jeopardy by another legislative action.
For individuals who have previously reached the $5,490,000 gift tax or generation-skipping transfer tax exemption, they now have the opportunity of gifting another $6,090,000 (or double this in cases of married couples) to family members. Individuals can also bestow gifts within these limits to grandchildren or more distant descendants without incurring the 40% tax rate.
The increase in federal exemptions provides individuals with opportunities to retain more control of their assets for generations to come. In addition to this, the annual exclusion gifting amount has remained steady in 2020 at $15,000 per donee (or $30,000 per donee if spouses split gifts), which remains subject to indexing in future years.
The increase in the exemption amount open opportunities to employ several techniques that can maximize a family’s control over its wealth, including:
- Allowing those who have previously reached the limit to double their amount of gifts, including those made to generation-skipping trusts.
- Selling assets to intentionally defective grantor trusts (IDGT), which allow the grantor to continue making tax-free gifts to the trust.
- Creation of a Dynasty Trust, which is a perpetual trust that is intended to last for many generations, usually beyond the individuals’ lifetime.
- Making intra-family loans or cast gifts to operate as a prepayment of existing loans from senior family members.
- Employing a Grantor Retained Annuity Trust (GRAT) to remove appreciation from your taxable estate.
Considerations for Estate Planning
While it is clear that undergoing estate planning activities and transferring any additional wealth and assets now is one of the biggest actions you can take to make a positive impact on your family’s financial future, there are several other considerations to keep in mind.
The federal exemption is the only one impacted by this change; state tax law can vary from state to state - some of which altered their existing gift and generation-skipping transfer limits, while others didn’t. If you are uncertain about your state gift tax limits and rates, you should contact an estate planning attorney for more information.
But perhaps the most significant thing to remember is that the increased exemption limit is temporary. It has an expiration date, and while it may seem like you have plenty of time to reduce your taxable estate, it’s important also to realize that one-quarter of the allotted time for this temporary change has already lapsed. While you had eight years to make changes on January 1 of 2018, you have less than six years left to take action. If you haven’t done so already, it’s time to begin or expand upon your estate planning activities to ensure that you are optimizing your transfers of wealth.