Well, this week’s earlier blog post about the 2018 Estate and Gift tax credits and exemption is already stale and probably bad law. Yesterday, Congress passed a stunning tax plan and President Trump is expected to sign the bill. (The bill has received great criticism because it increased the deficit by 1.5 trillion.) The bill makes dramatic alterations to the federal Estate and Gift Taxes.
Let’s examine a bit of history first. When I came out of law school in 1999, the federal unified credit equated to $650,000 . (52,000 estates paid the tax in 2000 when the exemption was $675,000.) Most couples would employ trusts in order to take advantage of each other’s unified credit and not waste it under the standard unlimited marital deduction.
Then the amount increased to $675,000 in 2000. Then for 2002-2003, it was $1 million. Congress had built in automatic increases for 2004-2005 to $1.5 million, $2 million for 2006, 2007, and 2008. Then $3.5 million for 2009. The forgot 2010. Then it was raised to $5 million in 2011. Then President Obama smartly added inflation indexing to the $5 million. So the actual amount began increased based off annual inflation. By 2017, because of inflation, the credit had increased to $5,490,000 per individual. However, President Obama also allowed couples to use each other’s unified credit through a process called portability. (There are some nuances to portability that are not capable of being quickly explained.) So, as a general principle, a married couple could transfer about $11,000,000 estate tax free.
Now comes the new law. For estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026, the Act doubles the base estate and gift tax exemption amount from $5 million to $10 million.
The tax bill, passed by the House and Senate yesterday, temporarily doubles the annual exclusion amount (the exemption) for estate, gift and generation-skipping taxes from the $5 million base, set in 2011, to a new $10 million base, good for tax years 2018 through 2025. The exemption is indexed for inflation, so it looks like an individual can shelter $11.2 million in assets from these taxes. Another federal estate law provision called portability lets couples who do proper planning double that exemption. So, a couple could exclude $22.4 million.
There will be a lot of planning immediately whereby couples will lock in the proposed law before future Congress changes its mind. They will likely employ the lifetime gifting provisions.
The law’s sunset means that, absent further Congressional action, the exemption amount would revert to the $5 million base, indexed. . . Under current law, each person for 2018 had a $5.6 million exemption. Now each person will have an $11.2 million exemption. So, a couple has an extra $11.2 million to gift or transfer at death. “It’s better to give now while the law is certain,” she adds.
What will these gifts look like? A memo circulated yesterday by estate planner Ronald Aucutt with McGuireWoods says strategies to consider include:
- 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 and
- Pairing gifts with philanthropy (such as a charitable lead trust)
I think this law ultimately eliminates the need for advanced-tax estate planning for most families. Joint Committee on Taxation estimates the number of taxable estates would drop from 5,000 under current law to 1,800 under the new law in 2018 in the entire nation. I am glad I didn’t narrow my practice (as I originally planned in law school) to tax estate planning.
