2018 Gift and Estate Tax Changes under the Tax Cuts and Jobs Act: Transfer More Wealth Tax-Free
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a wide array of changes to most areas of the tax law beginning with the 2018 tax year, including gift and estate taxes.
The 2018 annual gift exclusion is $15,000, increased from $14,000 in 2017. This exclusion is the amount you can give away per person per year tax-free. In addition, married couples can elect to split gifts. Utilizing this strategy, married taxpayers can gift up to $30,000 to an individual in 2018 before a gift tax return is required. Annual gifting is an excellent way to reduce the value of a taxpayer’s gross estate over time, thereby lowering the amount subject to estate tax upon date of death.
The 2018 lifetime gift exemption is $11,180,000 (indexed for inflation), which increased significantly from $5,490,000 in 2017. This exemption is the total amount you can give away over the course of your entire lifetime tax-free. The Act more than doubles the lifetime exemption, but only temporarily. It is scheduled to sunset at the end of 2025 unless Congress renews the provision, and the prior exemption amount will be restored, as indexed for inflation.
The portability election remains under the Act. It is an imperative planning tool for taxpayers, especially if the death of a spouse occurs while the increased exemptions are in place. Portability allows the second spouse to have the benefit of the deceased spouse’s $11.18 million exemption, even if the second spouse dies when a lower exemption amount is in effect. Keep in mind that an estate tax return will need to be filed when the first spouse dies in order to make the portability election, even if the gross estate is under the filing threshold.
No changes were made under TCJA to these provisions, which allow a step-up in tax basis for most inherited appreciated assets (excluding retirement accounts and annuities). Generally, basis is the amount paid for an asset. Upon death, the beneficiaries are allowed to increase the tax basis of an inherited asset to the fair market value at the date of the decedent’s death.
ESTATE PLANNING CONSIDERATION
Although you have until December 31, 2025, to take advantage of the increased gift tax exemption, making gifts sooner rather than later will allow you to remove future appreciation of gifted assets from your estate. You must, however, carefully weigh the loss of a step-up in income tax basis for any gifted asset when compared to the step-up in basis that would result if assets are held until death and included in your estate. This is especially relevant for those who do not anticipate having estates that exceed the exemption amount of $11.18 million for single people and $22.36 million for married couples.
Married people with estates below the threshold amount should focus on the following tax and non-tax considerations:
- Whether assets should be bequeathed outright or in trust for a surviving spouse.
- Maximizing step-up in basis on the surviving spouse’s death.
- Taking advantage of portability.
SECTION 199A AND TRUSTS
The TCJA created a new Section 199A deduction, which allows certain taxpayers a 20% deduction on qualified business income (QBI). The 199A deduction has taxable income limitations, based on the taxpayer’s total income. In order to maximize the 199A deduction, taxpayers should consider utilizing non-grantor trusts, which are separate taxpayers, each eligible for the 199A deduction. (The proposed regulations under Section 199A prevent a taxpayer from establishing multiple trusts with the same grantor and beneficiaries for the principal purpose of avoiding income tax).
UPDATE ON INTERGENERATIONAL SPLIT DOLLAR
Intergenerational Split Dollar is a strategy used to minimize gift and estate taxes and involves large insurance premium payments. Under this technique, an adult child will purchase life insurance on his/her life (through a life insurance trust) and pay the premiums with a loan from the parent. Since the loan will not be paid back until the death of the child, that loan receivable is discounted in the parent’s estate (which results in an estate tax benefit to the parent).
In a settlement in the Cahill case in August 2018, the estate conceded to the IRS’s valuation of the note receivable of $9.6 million, instead of the estate’s reported value of $183,700. Due to the IRS victory in this case and other similar cases, you should not pursue this type of split-dollar arrangement if a discount on the receivable is a significant part of the plan.
Now is a good time to meet with your Marcum tax professional to consider the best ways to make additional gifts using the increased exemption, as there are benefits to making the gifts now as opposed to waiting until the exemption is about to expire.