Final Tax Bill Includes Huge Estate Tax Win For The Rich: The $22.4 Million Exemption
President Donald Trump’s vow to kill the federal estate tax failed, but his family, and other high-net worth families, could still come out way ahead based on changes to the estate, gift and generation-skipping taxes in the final tax bill that awaits his signature.
“It’s a huge benefit to the wealthy,” says Beth Kaufman, an estate lawyer with Caplin & Drysdale in Washington, D.C.
WASHINGTON, DC - DECEMBER 20: U.S. President Donald Trump (C) pauses during an event to celebrate Congress passing the Tax Cuts and Jobs Act with (L-R) Senate Majority Leader Sen. Mitch McConnell (R-KY), Sen. Lamar Alexander (R-TN), Vice President Mike Pence, Rep. Kristi Noem (R-SD) and other Republican members of the House and Senate at the South Lawn of the White House December 20, 2017 in Washington, DC. The tax bill is the first major legislative victory for the GOP-controlled Congress and Trump since he took office almost one year ago. (Photo by Alex Wong/Getty Images)
The tax bill, passed by the House and Senate yesterday, temporarily doubles the exemption amount for estate, gift and generation-skipping taxes from the $5 million base, set in 2011, to a new $10 million base, good for tax years 2018 through 2025. The exemption is indexed for inflation, so it looks like an individual can shelter $11.2 million in assets from these taxes. Another federal estate law provision called portability lets couples who do proper planning double that exemption. So, a couple could exclude $22.4 million for 2018. Watch out: The law’s sunset means that, absent further Congressional action, the exemption amount would revert to the $5 million base, indexed.
In this window, the tax bill offers enormous planning opportunities for the rich. “Any client who can afford to do so will want to use their exemption for gifts, in case it actually does sunset,” says Kaufman. For couples, this would benefit anyone with $11 million or more in assets. Under current law, each person for 2018 had a $5.6 million exemption. Now each person will have an $11.2 million exemption. So, a couple has an extra $11.2 million to gift or transfer at death. “It’s better to give now while the law is certain,” she adds.
What will these gifts look like? A memo circulated yesterday by estate planner Ronald Aucutt with McGuireWoods says strategies to consider include:
· Making gifts to existing or new irrevocable trusts, including generation-skipping trusts
· Leveraging gifts to support the funding of life insurance or existing sales to trusts and
· Pairing gifts with philanthropy (such as a charitable lead trust).
Note, the tax bill doesn’t make changes to the rules that step-up basis at death. That means that when you die, your heirs’ cost basis in the assets you leave them are reset at the value when you die.
Far fewer estates will be subject to the levy — the Joint Committee on Taxation estimates the number of taxable estates would drop from 5,000 under current law to 1,800 under the new law in 2018. By comparison, 52,000 estates paid the tax in 2000 when the exemption was $675,000.
Separately, the annual exclusion amount that an individual can give to any number of individuals without eating into the lifetime gift tax exemption was not changed by the new tax law. It will be $15,000 for 2018, up from $14,000 in 2017, thanks to indexing for inflation.