The Impact of the Tax Reform Law on Gift and Estate Planning

Rebecca Whitacre

While the Republicans did not repeal the federal estate tax, Congress passed the largest tax reform package since 1986, commonly known as the "Tax Cuts and Jobs Act." President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. This alert will describe the significant changes to federal transfer tax planning, including gift, estate, and generation-skipping transfer ("GST") taxes.

Summary of the Law. You have a gift tax exemption (related to gifts made during life), an estate tax exemption (related to transfers made at death), and a GST tax exemption (related to transfers that skip a generation, such as transfers to grandchildren). Any gift tax exemption that is used during life will reduce your estate tax exemption remaining at death. You also have an annual gift tax exclusion, which is unrelated to the gift tax exemption. Before the new law passed, the base amount for the gift, estate, and GST tax exemptions was $5,000,000 (indexed for inflation).

Significantly, the Tax Cuts and Jobs Act doubles the base amount to $10,000,000, and for 2018, the exemptions (indexed for inflation) are $11,200,000 per person ($22,400,000 for a married couple). However, this temporary doubling of the base amount will "sunset" on December 31, 2025, and on January 1, 2026, the exemption amounts will revert to the $5,000,000 base amount (indexed for inflation), absent Congressional action.

The tax rates have remained the same (40% is the highest marginal gift and estate tax rate, and the GST tax is a flat 40% rate). The annual gift tax exclusion will increase from $14,000 to $15,000 per person, per donee in 2018.

Impact on Your Planning. In general, the increase in the exemptions may have an impact on your current estate plan and cause you to consider the need to review or revise your Will to be sure your assets still pass according to your wishes. For some clients, this may be a time to simplify your estate plan, especially if your Will was prepared before 2009, when the estate tax exemption was significantly lower, and if you do not anticipate that your estate will exceed $5,000,000 ($10,000,000 for a married couple).

For other clients, this is a unique opportunity to engage in gift planning over the next few years to take advantage of the increased exemption amount before the sunset occurs, because there is no certainty that these increases will be extended. You may consider making large gifts to one or more irrevocable trusts for children or grandchildren in order to shift future appreciation and use your increased gift and GST tax exemptions. You may also consider transferring assets to a trust for your spouse, with your children and grandchildren as secondary beneficiaries (e.g., a life insurance trust or spousal access trust). There may be other strategies to consider for your particular situation.

If you wish to review and revise your estate plan, or if you are interested in discussing how you can use your increased gift tax exemption effectively, please contact our office.