US Tax Reform – Estate and Gift Tax Implications
Tax Cuts and Jobs Act provides US persons certain beneficial estate planning opportunities. Below are a few of the highlights of the Act that impact estate planning.
For any US individual dying after December 31, 2017, the act increases the federal estate tax exemption amount to $11.18 million (from $5.49 million in 2017). The exemption amount is expected to be adjusted annually due to inflation from 2019 onwards.
The Act provides that the higher exemption levels are effective through 2025, and will revert to prior law (with the exception of retaining the formula for computing the inflation adjustment) on January 1, 2026.
Unless the tax law changes between now and then, the exemption amount per US individual will revert back to $5 million plus the inflation adjustment, on January 1, 2026.
Portability of Exclusion
This is retained under the tax reform. This means that upon a married US individual’s death, any unused Estate Tax exemption can be passed to his or her surviving US spouse.
In 2018, a US individual can gift up to $15,000 per individual ($30,000 per individual for married couples). Any gift made over these limits will count against the $11.18 million lifetime gift tax exemption amount which is the same as the Estate Tax exemption.
The following “gifts” do not reduce the $11.18 million lifetime gift tax exemption amount:
- Tuition payments made directly to an educational organization on behalf of a person
- Payments for a person’s medical care made directly to the provider.
- Gifts made to a non-US citizen spouse (limited to $152,000 for 2018 and $155,000 for 2019 – up from $149,000 in 2017)
The GST Tax
There is a “generation-skipping transfer tax” applied on wealth transfers that skip a generation and exceed an individual’s “GST tax exemption” (under the tax reform – $11.18 million). An asset transfer from a grandparent to a grandchild, for instance, would be subject to a 40% tax on transfers over the exemption amount. The Act increases the exemption for transfers made after December 31, 2017 to $11.18 million which will be adjusted for inflation from 2018 to 2025.
For 2019, the $11.18 exemption amount for Estate/Gift/GST will increase to $11.4 million.
Now may be an ideal time to establish a Dynasty Trust, given the higher gift and GST exemptions. A Dynasty Trust is an irremovable trust that allows wealth to grow and compound free of federal gift, estate and GST taxes for multiple generations. The longevity of a Dynasty Trust varies from state to state.
Please contact a member of our team for help with estate planning.