Changes to the Estate and Gift Taxes
With the passage of the recent tax act, you may be wondering what your strategy for avoiding estate and gift taxes should be now.
First of all, for those of us who have less than $5 million and expect to always have less than $5 million, nothing has changed. You did not have an estate tax problem before the tax bill was passed and you do not have an estate tax problem now that it is passed.
What about those who are in the $5 million range, right on the cusp of being subject to estate tax at death? First, if you are married, between spouses you had pre-Act about $11 million in exemption, meaning between the two of you, if you and your spouse had died in 2017, you could have left $11.2 million tax free to your heirs, whomever those lucky souls might be.
Since you are reading this, your heirs are going to have to wait. But for some that is a good thing because now the estate tax exemption is $11.2 million for each spouse, for a combined estate tax exemption of $22.4 million.
But remember, to get the combined exemption for both spouses, the surviving spouse must file a 706 estate tax return to claim the exemption of a deceased spouse.
The $11.2 million exemption is indexed for inflation, so it will increase each year through 2025. I doubt Congress will fiddle much with this in the intervening years, but as 2025 approaches, you might want to begin paying attention to the estate tax law again because, unless Congress acts to extend the increased exemption, the per person exemption will drop back from the $11.2 million (as may be adjusted for inflation) back down to the $5 million range, subject to inflation adjustments.
One way to beat the taxman and lock in your $11.2 million (or $22.4 million combined exemption for spouses) is to make gifts before the law changes, utilizing the full $11.2 million exemption before it has a chance to expire.
There are some who fear that if the exemption drops back to $5 million, the IRS will be able to tax the gifts in excess of the $5 million by imposing the estate tax at death in an amount equal to what the tax would have been had the gifts not been made.
This is called a clawback. This clawback has not happened in the past and we do not expect it to happen in the future, but there are no guarantees . Still, if you have the wherewithal and generosity to make these multi-million dollar gifts, utilizing the exemption before it expires is something to keep in mind as Dec. 31, 2025 approaches. But that is nearly 8 years away, a lifetime in the world of tax law.
So unless you have an estate much, much larger than $11 million (or $22 million if you are married and think you have a pretty good shot at remaining in that condition come the end of 2025) we recommend you adopt a wait-and-see approach, and see if Congress extends the exemption in the coming years.
For those who have assets in excess of these exemption amounts, gifting into various types of trusts is worth considering.
The annual exclusion, which is the amount of gift you can make to another person without being required to report the gift on a gift tax return, has increased in 2018 from $14,000 to the nice round number of $15,000. Of course, you may still make unlimited tax free gifts to a spouse.
For those who hope or expect to be approaching the $11.2 million exemption limit in the coming years, utilization of the $15,000 per year annual exclusion might be worth using. One effective technique is to purchase an insurance policy and then use the annual exclusion to cover the gift taxes that would otherwise be due for payment of the premiums on the insurance policy.
And remember, that exemption is $15,000 per person, so you could set up a trust for your 10 wonderful grandchildren and, as your friendly life insurance salesman would point out, you could pay an annual insurance premium of $150,000 without incurring any gift tax ($300,000 if done by spouses). That could build up a nice legacy for those grandchildren.
A benefit of these increased exemptions is that as estate planning attorneys, in drafting trusts we can be more focused on doing what the client wants to do and not be so concerned about the tax implications of planning. This makes the drafting process much better because it leaves more options available in structuring the plan.
If you happen to live in one of 17 states that have an estate or inheritance tax, you will want to look a little deeper. For example, Massachusetts and Oregon still impose their estate and/or inheritance taxes for estates over $1 million, whereas other states have reduces or are eliminating their estate and/or inheritance taxes. Nevada has no estate or inheritance tax.
Call our experienced attorneys if you have any questions, need a free consultation and if we can help you with your planning!