Estate Planning after Tax Reform

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Tax reform included major changes to gift and estate taxes. The new laws significantly reduces the number of taxpayers who will be subject to gift and estate taxes, at least for the next several years, but factoring taxes into your estate planning is still important if you live in a state with an estate tax.

Exemption increases

The Tax Cuts and Jobs Act (TCJA) more than doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million for 2018.

This amount will continue to be annually adjusted for inflation through 2025. Absent further congressional action, however, the exemptions will revert to their 2017 levels (adjusted for inflation) for 2026 and beyond.

The rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate.

The impact

Even before the TCJA, the majority of taxpayers did not have to worry about federal gift and estate taxes. While the TCJA protects even more taxpayers from these taxes, those with estates in the roughly $6 million to $11 million range (twice that for married couples) still need to keep potential post-2025 estate tax liability in mind in their estate planning. Although their estates would escape estate taxes if they were to die while the doubled exemption is in effect, they could face such taxes if they live beyond 2025.

Taxpayers who could be subject to gift and estate taxes after 2025 may want to consider making gifts now to take advantage of the higher exemptions while they’re available.

Income tax planning, which became more important than estate planning back when exemptions rose to $5 million more than 8 years ago, is now an even more important part of estate planning.

For example, holding assets until death may be advantageous if estate taxes are not a concern. When you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains tax should he or she turn around and sell it. When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. In this scenario, retaining appreciating assets until death can save significant income tax.

Be aware that many states impose estate tax at a lower threshold than the federal government does.

Whether you need to be concerned about federal gift and estate taxes, having an estate plan in place and reviewing it regularly is important.

SKR+CO Expert
Ann Koenigsman, CPA, CTFA, Tax Partner
Ann has been in public accounting since 1986. Her specialties include estate planning, estate and gift tax and the taxation of trusts.