The Tax Cuts and Jobs Act of 2018 went into effect on January 1, 2018. The new law makes some changes to key estate planning-related provisions. Except as otherwise noted, these changes are effective now and will sunset at the end of 2025, unless changed in the future by Congress. Among these changes are:
- Increased Applicable Exclusion Amount and GST Exemption. The new law doubles the estate and gift tax applicable exclusion amount, from $5 million to $10 million, for gifts made after and estates of decedents dying on or after January 1, 2018, and before January 1, 2026. By increasing the applicable exclusion amount, the new law automatically increases the generation-skipping transfer tax exemption to the same amount. Because these numbers are indexed, the actual exemptions for 2018 are approximately $11.2 million for individuals and $22.4 million for married couples. When the law sunsets at the end of 2025, the exemption amount will revert to 2017 levels (adjusted for inflation).
- Cash Gifts to Public Charities. The new law raises the deduction limitations for cash contributions to public charities from 50% to 60% of an individual’s adjusted gross income. There is still a five-year carryover for unused cash contribution deductions that are otherwise subject to the new 60% limitation.
- Increased Annual Exclusion. Not part of the new law, but worth noting, is that the annual exclusion from gift tax has increased to $15,000 per recipient, for 2018. Tuition and medical expenses paid directly to a provider continue to be excluded from the gift tax altogether. Lifetime gifts beyond the annual exclusion amount of $15,000 will count towards the donor’s lifetime $11.2 million combined estate/gift tax exemption.
- Pass-Through Businesses Owned by an Estate or Trust. The new law provides that an individual taxpayer generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship. The new law extends this rule to interests owned by trusts and estates.
- The Kiddie Tax. The new law replaces the kiddie tax with a rule that taxes the net unearned income of a child at the ordinary income and capital gains rates applied generally to trusts and estates.
- Miscellaneous Itemized Deductions. The new law eliminates the individual tax deduction for miscellaneous itemized deductions (such as legal, investment advisor and accounting fees) that would otherwise have been subject to the 2% floor under Section 67 of the Internal Revenue Code.
Planning Opportunities. With the dramatic increase in the gift and estate tax exemption, there are expanded planning opportunities. Older estate plans may not maximize tax planning opportunities or may produce unexpected or undesired results. We strongly recommend that you review your plan to be sure that your documents produce the results you want. In particular, plans that were tied to the exemption amounts in dividing assets among beneficiaries (spouse, children, generation-skipping trusts, charity) may be problematic.
For those with significant assets, there are opportunities to use the additional gift and estate tax exemption before the exemption reverts to 2017 amounts. The new law will allow you to immediately remove over $11.2 million ($22.4 million for married couples) from your taxable estate. While this opportunity will last until December 31, 2025, acting sooner will remove the $11.2 million (or $22.4 million) and all post-transfer growth from your estate, and will protect against future reductions in the exemption.
Note that the Oregon and Washington estate tax system is not affected by the new law. The Oregon estate tax exemption remains at $1,000,000 and the Washington estate tax exemption remains at $2,193,000 (indexed for inflation). Washington and Oregon do not have a gift tax system, so lifetime gifts should continue to be considered as a way to reduce state estate tax. Because gifted property retains the donor’s basis, careful analysis is required to determine the appropriate type and amount of property to be gifted.
This is a very high-level discussion of the changes brought about by the new law. There are many more complex changes. Individual circumstances will dictate what kind of planning, if any, may be warranted. We would be happy to discuss these and other parts of the new law that may apply to your specific situation.