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Educational Resources

By Jeffrey R. Wolfe, Senior Vice President, Manager of Wealth Planning Strategies

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Happy New Year!  And what a new year it has been already.  First, the annual gift tax exclusion (the amount you can gift tax-free each year) has increased from $14,000 to $15,000 per person.  Thus, you can give up to $15,000 per person to as many people as you’d like.  That’s a good start to the year.

There’s been even bigger changes, though.  In case you haven’t heard, there also was a tax law passed, the Tax Cuts and Jobs Act (“Act”).  In the Act were significant changes to income tax laws, corporate tax laws, and estate and gift tax laws.  For our purposes, we’re going to focus on the estate and gift tax changes.

First, the Act doubles the estate tax exclusion amount to $11.2 million in 2018 for all individuals.  What this means is individuals may be able to pass up to $11.2 million at death ($22.4 million for a married couple with proper planning) free from federal estate tax.  The estate tax rate remains at 40%.

The gift tax exclusion amount remains unified with the estate tax exclusion amount, so it is now $11.2 million as well in 2018.  Again, this means you may be able to gift up to $11.2 million during your lifetime free from federal gift tax.  The gift tax rate also mirrors the estate tax rate, 40% for taxable gifts.  It is important to remember that any taxable gifts made during your lifetime will reduce your estate tax exclusion amount dollar for dollar.

The Generation-Skipping Tax (“GST”) exclusion amount for 2018 is also $11.2 million. GST tax rate is also 40%, and is an additional tax to any previous estate or gift tax liability.  Recall that GST may apply when assets are transferred to “skip” persons (generally someone more than one generation away from the grantor, like grandchildren and more remote descendants).

While these changes are all pro-taxpayer, as written the Act is short lived.  All the transfer tax provisions are to sunset in 2025, meaning the exclusions will revert to 2017 numbers ($5.49 million, adjusted for inflation), starting January 1, 2026.

So, what does all of this mean?

For estate planning purposes, these changes primarily mean nearly everyone should review their current estate plan.  By changing the exclusion there is a chance your plan may have changed significantly.  For example, consider most traditional trust plans for married people call for a funding of the credit shelter trust first.  This is a trust plan designed to use as much of one’s exclusion as possible at the first spouse’s death.  With an $11.2 million exclusion that means that most estates will have all their assets pass to the credit shelter trust under the traditional funding process.  This may or may not be what you want or expect.

Moreover, it may be worth considering different planning under these new rules.  There are possible techniques to seek step-up in basis at each spouse’s death if estate taxes are no longer an issue for example.  This is not something that could be achieved with “traditional” credit shelter trust planning.

It also means now is the time of opportunity for some.  If you have been considering larger taxable gifts but were afraid to use all of the exclusion, now may be the time to make a significant gift.  Given the GST exclusion is also high, gifting to multi-generational trusts could be transformative for family wealth.

There are also pitfalls with these exclusions.  Some may feel that planning is no longer needed as estate taxes won’t be a concern for most.  Others may feel that since the sunset is coming there’s no reason to proactively plan.  Both are shortsighted.  At a minimum, review your existing plans to make sure your legacy goals will continue to be met.  There are more concerns than just federal taxes, like controlling your legacy, asset protection for beneficiaries, and state and local tax concerns.

Your Benjamin F. Edwards Financial Advisor is prepared to help you with this journey.  While Benjamin F. Edwards & Co. does not provide tax or legal advice, we can work with your estate planning attorney and tax advisor to help you reach your legacy goals.

January 10, 2018 |