President Donald Trump’s desire to completely end the federal estate tax may have failed, however high-net-worth families, still come out way ahead. Changes were made to the estate, gift and generation-skipping taxes in the final tax bill.
The tax bill, recently signed into law, temporarily doubles the annual exclusion amount (the exemption) for estate taxes, gift taxes and generation-skipping taxes from $5.6 million that was set in 2011, to a new $11.2 million base (indexed for inflation). This is effective for tax years 2018 through 2025.
Additionally, a federal estate law provision called portability allows couples (with proper planning) to double this exemption. Essentially, a married couple could exclude $22.4 million. One caveat: The law’s sunset in 2025 would revert back to the $5.6 million base (absent any additional congressional action).
The tax bill provides significant planning opportunities for the high net worth families. Families who can afford to do so will want to use their exemption for gifts, in the event the new law actually does sunset. With the new tax law, each person will have an $11.2 million exemption. This means a couple has an extra $11.2 million to gift or transfer at death. High net worth families may be well advised to structure their gifts now while the new tax laws are still in place.
What are some examples of how these gifts may be applied?
Making gifts to existing or new irrevocable trusts (including generation-skipping trusts)
Leveraging gifts to support the funding of life insurance or existing sales to trusts
Pairing gifts with philanthropy (such as a charitable lead trust).
It is worth noting the tax bill doesn’t make changes to the step-up basis at death. That means upon death, your heirs’ cost basis in the assets you leave them are reset at the value when you die.
The changes in the new tax code have the ability to significantly impact high net worth families. With just a little planning the impact can be significantly increased. To set up a time for a conversation on how you can take advantage of these changes – give us a call.