Estate and Gift Taxes in 2018 after the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (the “Act”) increased the federal estate tax exclusion amount from $5 million to $10 million indexed for inflation for decedents dying in years 2018 to 2025. This amount is indexed for inflation back to 2011. The exact amount of the exclusion amount is not yet known for 2018. However, it is estimated to be $11.18 million. This means that an individual can leave $11.18 million and a married couple can leave $22.36 million dollars to their heirs or beneficiaries without paying any federal estate tax. This also means that an individual or married couple can gift this same amount during their lifetime and not incur a federal gift tax. The rate for the federal estate and gift tax remains at 40 percent.
Generation Skipping Transfer TaxThe doubling of the basic exclusion also means that the Generation Skipping Transfer Tax (GST) exclusion is doubled to match the basic exclusion amount of $11.18 million for an individual and $22.36 million for a married couple.
The sunsetting of the doubled basic exclusion amount after 2025 raises the prospect of exclusions decreasing in 2026. Taxpayers with estates over $11.18 million will want to discuss with their estate planning attorneys the potential for making transfers to take advantage of the larger exclusion amount before the anticipated sunset.
What is not ChangingThe Act does not make changes to the rules regarding step-up basis at death. That means that when you die, your heirs' cost basis in the assets you leave them are reset to the value at your date of death.
The Portability Election, which allows a surviving spouse to use his or her deceased spouse's unused federal estate and gift tax exemption, is unchanged. This means a married couple can use the full $20,000,000 exemption (indexed for inflation). To make a portability election, a federal estate tax return must be timely filed by the executor of the deceased spouse's estate.
Gift TaxIn 2018, the annual gift tax exclusion has increased to $15,000. This means that an individual can give away $15,000 to any person in a calendar year ($30,000 for a married couple) without having to file a federal gift tax return.
Despite the significantly larger Federal Estate Tax exclusion amount, New York State's estate tax exemption for 2018 remains at $5.25 million. New York State still does not recognize portability.
With the current New York State estate tax law as enacted in 2014, there is a limited three year look back period for gifts made between April 1, 2014 and January 1, 2019. This means that if a New York resident dies within three years of making a taxable gift, the value of the gift will be included in the decedent's estate for purposes of computing the New York estate tax. The following gifts are excluded from the three year look back: (1) gifts made when the decedent was not a New York resident; (2) gifts made by a New York resident before April 1, 2014; (3) gifts made by a New York resident on or after January 1, 2019; and (4) gifts that are otherwise includible in the decedent's estate under another provision of the federal estate tax law (that is, such gifts aren't taxed twice).
ConclusionUnder the Act's provisions, most taxpayers will never pay a federal estate tax. Even with the enlarged exemption, however, there are many reasons to engage in estate planning. Those reasons include long term care planning, tax basis planning and planning to protect your beneficiaries once they inherit the wealth. In addition, since New York State has a separate estate tax regime with a significantly lower exclusion than that of the Federal regime it is still critical to do estate tax planning if you and/or your spouse have an estate that is potentially taxable under the New York State law.