On December 22, 2017, President Trump signed a tax bill that had been passed by the Senate and House called “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”). This legislation is commonly referred to as the 2017 Tax Act. Although much of the media and public have focused on specific provisions of the Act regarding income taxation of corporations, pass through entities and individuals, the Act also contains important provisions dealing with federal transfer taxes (estate and gift) that may be relevant for your estate planning. A summary of the transfer tax provisions is as follows:
A. Federal Estate Tax. The Act doubles the federal estate tax exemption from $5M to $10M per individual. This exemption is indexed for inflation, so the actual exemption amount for federal estate tax starting in 2018 will be $11.2M1 per person, and therefore a married couple will be able to exclude $22.4M. This increase in exemption is scheduled to sunset after calendar year 2025 and will revert back to $5M per donor (as adjusted for indexing) unless there is further action by Congress and the President.
B. Federal Gift Tax. The Act also doubles the federal gift tax exemption from $5M to $10M per individual. The gift tax exemption is also indexed for inflation, so the actual gift tax exemption starting January 1, 2018 will be $11.2M per person. Starting on January 1, 2018, individuals may make up to $11.2M of gifts during lifetime without incurring any gift tax. As is the case with the federal estate tax, this increased exemption will revert back to the $5M (as adjusted for indexing) level starting in calendar year 2025, unless the increased gift tax exemption is extended by Congress and the President.
C. Federal Generation-Skipping Transfer Tax. The federal generation-skipping transfer tax was not expressly amended under the Act. However, the generation-skipping transfer tax exemption is defined in the Federal Tax Code as an amount equal to the federal estate tax exemption, and therefore the increases to the estate tax exemption likely apply to the generation-skipping transfer exemption as well. Thus, starting on January 1, 2018, the generation-skipping transfer exemption for individuals will likely be $10M (indexed for inflation).
D. Annual Gift Tax Exclusion. The annual gift tax exclusion will increase in calendar year 2018 to $15,000 per donee from the 2017 $14,000 level. This exclusion is in addition to the federal estate/gift tax exemption.
E. State of Washington Estate Tax Exemption. The State of Washington estate tax exemption remains at the $2M per individual level and it is also indexed for inflation. Thus, the actual exemption amount for 2018 is $2,193,000 per individual.
F. Washington State Gift Tax. Washington State has no gift tax.
G. State of Oregon Estate Tax Exemption. The State of Oregon estate tax exemption remains at the $1M per individual level. Unlike the exemption in Washington, Oregon’s exemption is not indexed for inflation.
H. Oregon State Gift Tax. The State of Oregon has no gift tax.
I. State of New York State Estate Tax. The State of New York estate tax exemption remains at $5,250,000 for decedents dying in 2018 and thereafter will be subject to an inflation adjustment.
J. State of New York Gift Tax. The State of New York has no gift tax.
K. State of California Estate Tax. The State of California has no estate tax.
L. State of California Gift Tax. The State of California has no gift tax.
These increased exemptions will reduce transfer tax exposure for many taxpayers. The fact that they are scheduled to sunset necessitates careful planning in order to fully evaluate and plan for the possibilities of use of these increased federal exemptions both during life and at death. The differentials in federal and state exemptions should also be considered in order to make such planning as efficient as possible. It would be prudent to determine the specific impact of the increased exemption amounts on your estate plan. Please contact us if you would like us to assist you in such evaluation. Note that the Act contains a direction for the Treasury Department to issue regulations that will address an issue commonly referred to as “claw back,” which can occur in the event the federal gift tax exemption amount decreases after a taxpayer makes a gift using some or all of the increased gift tax exemption and subsequently dies after the increased exemption amount sunsets. It is not known at this time whether the Treasury Department will issue rules that indicate that such excess gift is “clawed back” and taxed in the taxpayer’s estate, or if the Treasury will state that “claw back” will not occur in such situation.
FOOTNOTE1 This is an estimate. The Internal Revenue Service will compute the actual inflation adjustment for 2018.