On December 22, 2017, President Trump signed the highly anticipated “Tax Cuts and Jobs Act” of 2017. Significant gift/estate tax relief is provided by the new law. Notably however, proposals to repeal the estate tax did not prevail. This appears to signal that the estate tax is here to stay.
Key provisions of the new estate/gift tax law are as follows:
- Specifically, the estate and gift tax exemption for 2018 is $11,180,000. More generally, the estate tax exemption is doubled from (a base before inflation of) $5,000,000 to $10,000,000, for an eight year period. On December 31, 2025, the new law “sunsets,” and the exemption will revert to $5,000,000 (adjusted for inflation, the exemption is estimated to be in the range of $6.5M by then). Going forward, the index for inflation is adjusted using a slightly diminished CPI measure.
- Most taxpayers will not itemize their deductions under the new law, and therefore will lose the benefit of their charitable contributions. For those taxpayers who continue to itemize, charitable contributions remain deductible, with an increased cap on cash contributions to public charities (now 60% of adjusted gross income). The former “Pease limitation,” which phased out charitable deductions above certain income thresholds, has been eliminated. The net result is that significant charitable gifts will be rewarded, while the more modest charitable giver will effectively be penalized from an income tax perspective.
- 529 Plans can now disburse up to $10,000 tax free per year for tuition at elementary and secondary schools. Previously, only college or graduate school expenses qualified for tax-free disbursements from 529 Plans.
- Traditional IRAs that have been converted to Roth IRAs can no longer be recharacterized as traditional IRAs. Under prior law, this recharacterization option provided a benefit if the IRA declined in value before the due date of the income tax return reporting the conversion.
These are some action items to consider:
- Since the higher gift/estate tax exemption will expire at the end of 2025 under current law, this may present a “use it or lose it” opportunity. High net worth clients may wish to consider using these higher exemption amounts (and the corresponding generation-skipping exemption) with gifts to trusts for children or spouses. Many creative and leveraged gifting options can be developed to fit your family’s situation. Of particular interest in a secure marriage is one spouse’s creation of a trust for the other spouse that escapes inclusion in both estates. Death before 2026 is another option for using the higher exemption (but not one we generally recommend).
- If your Will makes a “formula” gift of your estate (or generation-skipping) exempt amount, we highly recommend you consult with a Farner & Perrin attorney regarding the effects of the new tax law. In all likelihood that formula gift has just doubled, and a revision to your Will may be in order.
- Taxpayers with estates below the estate tax exemptions may need to re-evaluate the use of a bypass trust (see following article).
Finally, the substantial income tax changes to the tax law are beyond the scope of this article. We would be pleased to consult with you on the effects the new law might have on your business income, and whether a business re-structuring might be beneficial.