by Andrew A. Strauss
The Internal Revenue Service has announced the annual inflation adjustments for the 2019 tax year:
|Gift and Estate Tax Exclusion||$5,490,000||$11,180,000||$11,400,000|
|GST Tax Exemption||$5,490,000||$11,180,000||$11,400,000|
|Gift Tax Annual Exclusion||$14,000||$15,000||$15,000|
| Annual Exclusion for Gifts to |
Federal applicable gift and estate tax exclusion are increasing to $11,400,000: As a result of legislation known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, beginning on January 1, 2019, an individual may give up to $11,400,000 (increased from $11,180,000 in 2018) during life or at death without incurring any federal gift or estate tax. Married couples may give up to $22,800,000 (increased from$22,360,000 in 2018). There is no North Carolina estate or gift tax. Federal estate and gift tax are assessed, effectively, at a flat rate of 40% above that exemption amount or if the exclusion is not available.
IRS issues proposed regulations addressing clawback concerns: For gifts made and estates of decedents dying before Jan. 1, 2018, prior law (Sec. 2010(c)(3)(A)) provided an exclusion from taxable gifts or estates of $5 million, indexed for inflation after 2011. For gifts made or estates of decedents dying after Dec. 31, 2017, and before Jan. 1, 2026, the TCJA increased the amount to $10 million, also indexed for inflation after 2011 (Sec. 2010(c)(3)(C)). Thus, the amount for 2017 was $5.49 million and, for 2018, $11,180,000 (rising to $11.4 million in 2019—see table above). Absent further action from Congress, the applicable gift and estate tax exclusion amount is set to be reduced back to approximately $5,000,000 per individual (indexed for inflation since 2011) in 2026. It is hard to predict what the exemption number will be in 2026, but 8 years of inflation at 2% a year should bring the 2026 exemption into something near $6 million. Remember, Congress can always act before 2026 so no planning horizon is completely safe when Washington is involved.
On November 20, 2018, the Internal Revenue Service issued under authority granted to the IRS in the TCJA proposed regulations ((REG-106706-18) (https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-25538.pdf)) to protect taxpayers who make large gifts during the temporary period where the higher exclusion amount applies (if it is not renewed or made permanent). If these proposed regulations are adopted, in the event of a decrease in the applicable exclusion, taxpayers dying in 2026 and beyond will not face a tax liability for lifetime gifts that were exempt from tax when made due to the increased exclusion amount available from 2018-2025. If the applicable exclusion is changed by legislation in the interim period before 2026 then presumably use of the exemption in that period will not be subject to clawback. A hearing on the proposed regulations is scheduled for March 2019.
Planning Opportunity: We urge clients to consider making lifetime gifts to lock in use of the current exemption amount. There are many ways to make gifts. Gifts may be made outright, to an irrevocable trust, or may take other forms, such as the forgiveness of intra-family loans. Note that gifts of cash or high-basis assets are optimal, because the recipient of a lifetime-gift takes the donor’s cost basis for capital gain purposes, while the recipient of a gift from a decedent’s estate receives a new cost basis equal to the fair market value as of the donor’s date of death; this is commonly referred to as a “step-up” in income tax basis. It is even possible to make gifts to spouses in trust so that the gifted assets are available to the family unit or to make gifts to a trust in certain states where the donor is a permitted beneficiary or can be added as a permitted beneficiary.
GST tax exemption increasing to $11,400,000: As of January 1, 2019, an individual may transfer up to$11,400,000 (increased from $11,180,000 in 2018) during life or at death without triggering the generation-skipping transfer (GST) tax. Married couples may give up to $22,800,000 (increased from $22,360,000 in 2018). The GST tax is an additional, flat tax assessed at the highest applicable federal estate tax rate (currently 40%) on transfers to persons two or more generations below the donor (i.e., to grandchildren or more remote descendants). As with the unified gift and estate tax exclusion, the GST tax exemption amount is set to be reduced back to approximately $5,000,000 (adjusted for inflation) in 2026.
Planning Consideration: Clients whose existing estate plans tie distributions upon death to the amount of estate tax or GST tax exemption available at the time of the donor’s death may now wish to review such plans to avoid unintended results. For example, a plan that provides that all GST-exempt property be distributed outright or in trust for grandchildren may result in a larger-than-intended distribution to the donor’s grandchildren (especially prior to 2026), and a smaller-than-intended distribution to the donor’s children.
Gift tax annual exclusion remains at $15,000: In 2019 an individual donor may make annual gifts of up to $15,000 per recipient without incurring gift or GST tax, and without using any of the donor’s federal unified gift and estate tax exclusion or GST tax exemption. Married couples may make annual exclusion gifts in 2019 of up to $30,000 per recipient, treating gifts made to third parties as if one half had been made by each spouse.