2018 Estate Tax and Gift Tax Changes

“It’s tough to make predictions, especially about the future.”
Yogi Berra

With the recently passed tax bill there is finally an official pronouncement from the IRS on the 2018 estate and gift tax exemptions. The IRS announced in October of this year that the gifting exemption both during life and after death is being raised to $5.6 million per individual, but the new tax bill will increase that to $11.2m!

Another October 2018 announcement by the IRS that came as a result of the inflation adjustment that is part of current tax law saw the annual gift tax exemption, which had been constant at $14,000 a year per person, increased to $15,000 per person per year effective January 1 2018. Clients who use the annual exclusion as a means of transferring assets out of their taxable estate can now gift $15,000 to each gift recipient on a yearly basis.

As mentioned above, tax reform could change all of this. The Senate version which was ultimately passed increases the estate tax exemption to $11 million from the 2018 level of $5.6 million, meaning that only estates above the $11 million would be taxable and subject to the 40% federal tax.

While we have been down this road before with possible estate tax changes, we now have a President that is firmly committed to making the estate tax less onerous. He is quoted as saying “(w)e want to make it easier for loving families to pass on their life’s work to their children. Be nice.”

The tax bill doubles the exemption for estate, gift and generation-skipping taxes to a new $10 million base (indexed for inflation, more than $11.2 million) for the tax years 2018 to 2025. This provision does “sunset” after that point unless extended by Congress and the President at that point (like the 2001 Tax Act which provided for the estate tax law to return to where it would’ve been without the enactment of the 2001 Tax Act in 2011).

Because the current law results in a significant imposition of estate and gift taxes on wealthy clients, we often recommend the use of a dynastic trust to take advantage of the generation-skipping tax exemption that the law provides. The current GST exemption will increase to $5.6 million next year or even higher possibly if the Senate has its way. The GST tax largely exists to be a backstop to both the federal estate tax and the income tax so that a wealthy client would not transfer assets to younger generations blow their children in order to escape the estate tax. Since the limitation on the estate tax is temporary or “sunsets,” however, it makes sense to take advantage of grandfathered dynasty GST trusts to use the new $11.2 million of exemption now, while you can. Such trust might allow our clients to pass assets over successive generations without the imposition of any future estate tax. Stay tuned!

-Andy Strauss