Love it or hate it, the Tax Cuts and Job Act is now in effect as of January 1, 2018. As pertinent to Elder Law and Estate Planning, the Act contains important provisions that govern gifting and planning. What follows below are highlights as to how estate plans could be impacted by the Act:
- Temporary Doubling of Gift, Estate, and Generation-Skipping Tax Exemptions. The Act doubles an individual’s exemptions for gift, estate, and generation-skipping (“GST”) taxes, increasing the exemption from $5 million to $10 million (as indexed for inflation). In 2018, an individual’s exemption for gift, estate, and GST taxes is just under $11.2 million, and a married couple’s exemption is just under $22.4 million. Property transferred in excess of the exemption will be subject to a 40% tax rate. There is currently no provision for the ultimate repeal of these taxes. The increased exemptions are temporary, however, and will last through December 31, 2025 absent other Congressional action. Barring any other changes, on January 1, 2026, the exemptions will revert back to the current $5 million level (adjusted for inflation). These changes create significant gifting opportunities.
- Tax basis rules remain unchanged. Just as before, inherited property will receive a stepped-up tax basis, but gifted property will not. Accordingly, a recipient of gifted property will receive the donor’s tax basis and pay more in capital gains taxes if the donor’s cost basis was relatively low, while the recipient of inherited property will receive a “step up” in tax basis equal to the value on the date of death.
- Portability rules remain in effect. Portability is the surviving spouse’s ability to use a deceased spouse’s unused estate and gift tax exemption, and it remains unchanged for gift and estate tax exemptions. However, there is no portability for the GST tax exemptions.
- Expanded 529 plans. These plans are designed to allow tax-free accumulation of savings for education. The new Act allows these plans to distribute income tax free to institutions of higher education as well as elementary or secondary schools subject to limits of $10,000 per plan beneficiary per year.
This Act contains significant tax legislation that offers numerous planning and gifting opportunities for individuals and couples. As a rule of thumb, and in light of these new laws, it is a smart idea to review existing estate planning documents to ensure the documents achieve all possible tax benefits as well as all non-tax objectives.