The 2017 Tax Cuts and Jobs Act made significant changes to every aspect of the tax code, including estate and gift taxes.
Prior to the 2017 tax act, the first $5 million (as adjusted for inflation in years after 2011) of transferred property was exempt from estate and gift tax. For estates of decedents dying and gifts made in 2018, this “basic exclusion amount” as adjusted for inflation would have been $5.6 million, or $11.2 million for a married couple with proper planning and estate administration allowing the unused portion of a deceased spouse’s exclusion to be added to that of the surviving spouse (known as “portability”).
The new law temporarily doubles the amount that can be excluded from these transfer taxes. For decedents dying and gifts made from 2018 through 2025, the Tax Cuts and Jobs Act doubles the base estate and gift tax exemption amount from $5 million to $10 million. Indexing for post-2011 inflation brings this amount to approximately $11.2 million for 2018, and $22.4 million per married couple, with some basic portability techniques.
The doubling of the basic exclusion amount will cause many estates to no longer be subject to federal estate taxation. Before adjusting a client’s estate planning, however; consider whether the client will be subject to a state estate tax. Illinois, for example, has a $4 million per person exemption, and while such a tax is deductible against the federal estate tax, if no federal estate tax is due the state estate tax is effectively increased.
A related transfer tax called for the generation-skipping transfer (GST) tax is designed to prevent avoidance of estate and gift taxes by skipping transfers to the next successive generation. The Tax Cuts and Jobs Act doesn’t specifically mention generation skipping transfers, but since the GST exemption amount is based on the basic exclusion amount, generation-skipping transfers will also benefit from the post-2017 increased exclusion.
This increased exclusion amount may have an impact on your current estate plan and cause you to consider the need to redraft some important documents and trusts.