2018 Estate & Gift Tax Update
The Tax Cut and Jobs Act More than Doubles the Unified Exemption Amount Above 2017 Level.
2018
brings a large increase to the federal unified exemption amount for
bequests and lifetime gift-giving, and this significant change warrants
careful review of tax planning provisions in existing estate planning
documents ‒ as well as consideration of lifetime gift planning.
Estate & Gift Tax (and GST) Exemption Amount for 2018
The exemption (or “exclusion”) amount for federal estate,
gift, and generation-skipping tax (“GST”) was slated under prior law to
increase slightly this year, as adjusted for inflation.
Accordingly, in October the IRS announced the 2018 estate and gift
tax unified exemption amount (and GST exemption amount) of $5.6 million
per person (up from $5.49 million in 2017). The exemption amount
was then doubled by the Tax Cut and Jobs Act signed into law on December
22, 2017 by President Trump. For 2018, the federal estate and
gift tax exemption amount is now $11.2 million per person (which
combined, totals $22.4 million for a married couple). [This is the
“unified exemption amount” for the sum total of a person’s “lifetime
gifts” (gifts in excess of the applicable annual exclusion amounts in
effect when the gifts were made), together with the property passing to
beneficiaries upon the donor’s death.] This figure also represents
the current exemption amount for generating-skipping gifts (e.g., gifts
to grandchildren). Estates (and/or lifetime gifts) in excess of
$11.2 million are taxed at a maximum rate of 40%.
Generation-skipping transfers in excess of $11.2 million are taxed at an
(additional) rate of 40%. As for future years: the new law
provides for annual inflation increases in the doubled exemption amounts
until 2025. On January 1, 2026 (in absence of future
legislation), the exemption amounts are scheduled to revert to the 2017
levels ($5.49 million per person), adjusted for inflation.
Income tax basis rules remain unchanged, with inherited
property (but not lifetime gifts) receiving a reset of basis at
date-of-death value.
North Carolina currently has no state inheritance, estate or gift tax.
Review of Estate Planning Documents for Outdated Provisions
In contrast to the high current federal estate and gift tax
exemption amount, as recently as 2008 the exemption amount was $2
million; in 2003 it was $1 million, and in 2001, it was $675,000.
This change has resulted in many outdated estate plans, and much of the
tax-avoidance attention in estate planning (for estates less than the
exemption amount) is shifting away from estate tax, focusing instead on
income tax considerations ‒ including efforts to maximize stepped-up
basis of appreciated assets and avoidance of capital gains. In
general, it is recommended that estate planning documents be reviewed on
a regular basis and whenever one experiences significant life changes ‒
or changes in dispositive wishes. It may also be important to
review estate planning documents to make sure estate tax planning
contained in earlier documents does not create any unnecessary income
tax burden under current tax law ‒ or cause other unwanted, non-tax
consequences.
Annual Exemption Gifts & Spousal Gifts
The federal annual gift exclusion amount increases for 2018
to $15,000 per donee (up from $14,000, the amount for the past five
years). This exclusion allows an individual donor to give an
unlimited number of “annual exclusion gifts,” so long as the amount of
each gift does not exceed $15,000 per donee during calendar year
2018. (Generally, married couples can give $30,000 per donee as
long as certain measures are taken.)
Annual exclusion gifts do not use up any of a person’s
lifetime “unified exemption amount,” and generally no gift tax return is
required. If you make a gift in excess of $15,000 to one donee,
you may still avoid paying a gift tax on the excess by filing a gift tax
return (IRS Form 709) and electing to use part of your unused unified
lifetime estate and gift tax exemption amount to cover the
overage.
As in years past, a person may give an unlimited amount to
his or her spouse by using the “unlimited gift tax marital deduction,”
as long as the donee spouse is a U.S. citizen. If the donee spouse
is not a U.S. citizen, tax-free transfers to the non-citizen spouse are
limited to a “super annual exclusion” amount of $152,000 in 2018 (up
from $149,000 in 2017). As with other gifts in excess of annual
exclusion amounts, the donor spouse may still avoid tax by filing a gift
tax return and electing to use his or her unused lifetime exemption
amount to cover the overage.
All annual exclusion gifts and spousal gifts must be gifts
of a “present” interest as opposed to a “future” interest, and further
qualifications can apply. It is recommended that you consult your
tax advisor prior to making a particular gift.
Other Tax-Free Gifting
Gifts to qualified charities may generally be made in
unlimited amounts, gift tax-free. In addition, certain direct
payments made on behalf of others are not considered “gifts” at all, and
may be made in unlimited amounts. These include direct payments
on behalf of another person to educational institutions for tuition and
to medical providers for medical care. These payments must be made
directly to the institutions or providers, however, or they will be
treated as gifts to the individuals. Because certain
qualifications apply, it is recommended that you consult your tax
advisor before making particular charitable gifts or payments on behalf
of others.
Update Reminder
As you contemplate your gift plans for 2018 and review your
current estate planning documents, consider also a review of your
beneficiary designations to confirm (1) that the designations are what
you think they are, (2) that they continue to conform to your current
wishes; and (3) that the designations are properly coordinated with your
overall estate plan.
You can find a discussion of IRA and life insurance beneficiary designations in "IRA and Life Insurance Beneficiary Designations: Time for a Tune-Up?"
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