By Julie Bartlett and Jordan Felts
Estate and gift tax planning were among the many areas of tax law impacted by the Tax Cuts and Jobs Act (the “ACT”), which took effect on January 1, 2018. In 2017 the lifetime gift and estate tax exemption amount was $5.49 million per individual. The ACT effectively doubled the 2017 lifetime exemption amount to $11.18 million per individual for 2018. The exemption is indexed for inflation and increases annually based on the cost of living. For 2019, the exemption is $11.4 million.
With proper planning, the increased exemption allows an individual to transfer up to $11.4 million and a married couple up to $22.8 million of assets without being subject to estate or gift tax. Of course, there are also unlimited deductions for qualifying transfers during life and at death to charities and spouses. Though the exemption amount changed, the top marginal estate and gift tax rate remains at 40% for 2018 and 2019 – unchanged by the ACT.
The substantial increase in the estate and gift tax lifetime exemption amount resulting under the ACT is subject to possible legislative changes and is not permanent. Without further action by Congress, the lifetime exemption amount is set to revert to its 2017 pre-ACT level (still indexed for inflation) beginning on January 1, 2026. This is the so called “Sunset.” As the law currently stands, taxpayers have now through 2025 to take advantage of the increased estate and gift tax lifetime exemption assuming no intervening legislative changes.
It is important to note that if a decedent’s gross estate (the fair market value of the decedent’s assets on the date of death plus prior taxable gifts) does not exceed the new increased lifetime exemption amount ($11.4 for 2019 million), an estate tax return is not required to be filed. However, in such circumstance, if an estate tax return is filed, the decedent’s unused lifetime estate and gift tax exemption may be transferred to the decedent’s surviving spouse for use during the spouse’s lifetime or at death. This concept is known as portability, and to take advantage of this beneficial election an estate tax return must be filed.
In addition to the increase in the estate and gift tax lifetime exemption amount, the gift tax annual exclusion amount received an inflationary increase from $14,000 to $15,000 in 2018. This increase allows an individual to give up to $15,000 and a married couple to give up to $30,000 to as many beneficiaries as they choose without decreasing their estate and gift tax lifetime exemption amount or owing estate or gift tax. The annual exclusion amount remains at $15,000 for 2019.
While the filing of a gift tax return is not required for gifts to individuals not exceeding the increased $15,000 annual exclusion per donee, a gift tax return is required if making gifts above the $15,000 annual exclusion. Though many gifts to trusts will qualify for annual exclusion treatment and not require disclosure by filing a gift tax return, many trusts do not qualify for such treatment and will require the filing of a gift tax return. To determine the treatment of gifts to trusts, please consult with your tax preparer or the attorney that drafted your trust. Additionally, gift tax returns are required to “gift split” – where one spouse makes a gift in excess of the annual exclusion amount and the couple wishes to treat the gift as being made by both spouses in order to utilize the annual exclusion treatment for both spouses. To do this, both spouses need to “consent” to the treatment on the gift tax returns each will file.
In light of these significant estate and gift tax changes, you may want to update your estate plan and gifting strategy to ensure that you take full advantage of the increased lifetime exemption and annual exclusion amounts. As there is only a window of opportunity, for many taxpayers it is important to get plans updated and put into action sooner rather than later.