Tax Reform Exempts More High-Net-Worth Families from the Dreaded Estate Tax by Rick Bazzani, CPA
Posted on January 01, 2018
by
Rick Bazzani
While the Tax Cuts and Jobs Act (TCJA) signed into law in December of 2017 did not make many adjustments to the existing gift, estate and generation-skipping transfer tax regimes, what it does do beginning on Jan. 1, 2018, is significant.
Doubles the Estate and Generation-Skipping Transfer Tax Exemption
Under the new law, the federal estate tax exemption for single filing taxpayers is temporarily doubled from $5.6 million in 2017 to $11.2 million in 2018. For married couples, the exemption for 2018 is $22.4 million. What this means is that individual taxpayers may transfer up to $11.2 million in assets to their heirs in 2018 (or up to $22.4 million for married couples filing jointly), either during life or at death, without incurring federal estate taxes. Anything above the excluded amounts would be subject to the same 40 percent flat tax rate that has been in effect since 2013.
Retains Step-Up Basis for Assets Transferred at Death
Beneficiaries who inherit the assets of a deceased taxpayer between 2018 and 2026, when the estate tax provisions of the TCJA are set to expire, will continue to receive a step-up in the value of those assets. Therefore, a beneficiary’s costs basis in an inherited asset would be readjusted upward to its current year fair market value, which could potentially minimize or even eliminate the beneficiary’s exposure to capital gains taxes should he or she sell the transferred property in the future.
Maintains Annual Gift Tax Exclusion
While the new law does not change taxpayers’ ability to annually gift cash or assets to as many people as they choose free of transfer taxes, the gift tax exclusion receives an inflation adjustment in 2018, increasing from $14,000 to $15,000 per beneficiary for single filers or $30,000 per beneficiary for married couples filing jointly. Any gifts above these amounts will be subject to 40 percent tax rate.
Reduces Income Tax Brackets for Trusts and Estates
In addition to lowering the existing seven income tax brackets, the TCJA also reduces the top bracket for estates and trusts to 37 percent on taxable income in excess of $12,500.
Warnings and Planning Opportunities
Despite the generous provision relating to the estate tax, the new law currently calls for the increased exemption to expire on Dec. 31, 2025, and revert back to 2017 limits in 2026. Without the ability to look into a crystal ball and know what Congress will do over the next eight years, high-net-worth families must plan appropriately under the guidance of experienced financial advisors and tax accounts. This may include establishing trusts, if none already exists, and maximizing gifts to these estate planning vehicles. These gifts effectively transfer assets out of an individual’s taxable estate to family members or other named beneficiaries and allow grantors to use trust assets to fund life insurance policies or, in some instances, pay income tax liabilities while they are alive.
About the Author: Rick D. Bazzani, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides individuals with a broad range of tax-efficient estate-, trust- and gift-planning services. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.
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