Updated: Oct 8, 2021
This column first appeared in the San Antonio Express News on December 22, 2017.
On Friday, December 22, 2017, President Trump signed the Tax Cut and Jobs Act (TCJA) into law. The new law makes large modifications to the income tax system, but this column will focus on changes to the estate and gift tax system.
The house version of the TCJA proposed to eliminate the estate tax altogether. The senate version retained the estate tax, but doubled the allowable exemption. The final law follows the senate’s version, so that an individual who dies in 2018 or after will have a $11.2 million exemption, and a married couple can double that to $22.4 million. This means that only a fraction of the top 1% of estates need plan for or worry about the federal estate tax.
Congress included a sunset provision, so that the exemption automatically snaps back to 2017’s limits (adjusted for inflation) when 2026 arrives. Congress did the same thing under the Bush tax cuts, and decided later not to allow the snap-back. If they follow their historical pattern, then in year 2025 Congress will entertain a bill to extended or make permanent the higher exemption amount. (Update: in October 2021, Congress is entertaining a bill that would reduce the exemption to about $6 million per person starting in 2022 but no change to the law has been actually passed.)
In the meantime, starting in January 2018, the gift tax lifetime exemption and the generation-skipping exemption also go up to $11.2 million per donor. This is a golden opportunity for the very wealthy to reduce the size of their taxable estates by making gifts. For example: a couple has assets totaling $30 million. Due to income and growth, they expect that in nine years the value will increase to $40 million.
If they die in 2026 and Congress allows the estate tax exemption to snap-back, they could owe over $11 million in estate taxes. However, if in 2018 they gift $11.2 million to their adult children (gift tax free) and $11.2 million to a trust for their grandchildren (free of the generation skipping tax) their estates are reduced to $7.6 million. If they die in 2026 and Congress allows the estate tax exemption to snap-back, their estate tax will be about $3 million. They save about $8 million because of the timely use of the exemptions.
Gifts do not need to be made directly to adult children; rather, they could be made to Irrevocable Trusts, to Generation-Skipping Trusts, or to buy life insurance payable to a Trust. Gifts to could be made to charities while retaining income benefits (as with a Charitable Lead Trust).
Clearly, the very wealthy need to consult with their estate planning attorneys and their accountants to see how the new exemption amounts can be best applied.
Middle-aged adults also need to know that the Health Insurance Mandate was repealed by TCJA starting in 2019. Under the Affordable Care Act, everyone was required to pay into the health care system to keep the average cost for each person lower. With repeal of that mandate, many younger, healthier members of society will drop their coverage and stop paying into the system. This will increase costs for the older (and often less healthy) members of society. The Congressional Budget Office estimates that about 13 million people will become uninsured by the year 2027, and premiums would increase by 10% every year for those who retain their health insurance.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.