The Tax Cuts and Jobs Act (TCJA) signed late last year brought to us the most comprehensive reform of our federal tax code in 30 years. There are dramatic changes to many areas that directly impact Americans. New tax rates and brackets, new standard deduction amounts, suspension of personal exemptions, pass-through deductions on qualified business income, new restrictions on state and local tax deductions and higher childcare tax credits are just a few of the changes for years beginning before 2026 (as noted below, these new provisions are expected to sunset as of 12/31/2025).
Another area that experienced a tax change is the estate and gift tax. The major estate tax change is not complex, just powerful. The basic exclusion amount allowed by law to be exempt from the estate and gift tax was doubled. Prior to the law’s passage, the amount was scheduled to be $5.6 million per person for 2018. It has now been doubled to $11.2 million per person in 2018 and this number will continue to be indexed for inflation. This is a tremendous increase that will come as good news to people with sizable estates.
And there is more. The $11.2 million applies per individual. Due to allowable elections already in the tax code (known as the portability election and the election to split gifts between spouses), this amount can again be doubled. That’s $22.4 million of assets that a couple could pass on to their beneficiaries without incurring any estate or gift taxes.
So what does this mean for families with potentially large estates on their horizons? Plenty.
For starters, the time to start planning is now. Since the TCJA is set to sunset for years after 2025, some families should consider utilizing the new thresholds now. Taxpayers should take the opportunity to examine and perhaps alter their estate plans to take advantage of the significant exemption increase. Like all succession planning, the right time to start is well in advance – when there is time to act strategically and deliberately without rushing or panicking. There are also opportunities for families with large estates to consider new ways to give portions of their wealth now by transferring it from one generation to the next.
The TCJA signals major change for tax policy in America, in both 2018 and beyond. When change occurs, opportunities happen. For many wealthier taxpayers, this opens the door to the possibility of major increase in wealth that is able to be transferred to the people that they want to inherit.
Remember, the term of the bill has a sunset provision that has these changes in effect through 2025. As long as there is no tax law change prior to then, the opportunities are available at least until then. Also, many states, such as Connecticut, Rhode Island and Massachusetts, have their own estate tax laws that need to be considered in planning.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.