On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law by President Trump. This new law has a number of implications for estate plans, but the most notable is the doubling of the Gift and Generation Skipping Transfer Tax (“GST”) Exemptions. Effective on January 1, 2018, the new law increased the base exemption for a single adult from $5.6 million to $11.18 million. A married couple would, through careful planning, be able to double that exemption. Currently scheduled to sunset in 2025, if not renewed or extended by Congress, this new exemption level allows individuals to change their estate plans to not only pay less in estate taxes, but also to worry less about “lowering” asset values through discounting, strategic gifting plans and other advanced planning methods.
In short, estate planning, especially for married couples with wealth, got a great deal easier under the new tax law.
How the Exemption Works
Essentially, an exemption is similar to (but better than) a tax deduction, a concept many people understand from completing their annual income tax returns. No tax is due on the portion of an estate valued upto the exemption amount. So, if you died with an estate worth $11,180,25, the first $11,180,00 would be exempt. You would owe estate taxes on $25.
From this simple example, it is obvious that the exemption amount or level is important. For estates that greatly exceed the exemption amount, estate planning requires attorneys to craft a plan that lowers the tax exposure of an estate through tools mentioned above, like discounting, strategic gifting plans and other advanced planning methods.
The Exemption Has Risen Significantly
Over the years, Congress has raised the exemption level and adjusted the tax rates. However, the exemption level has been raised most dramatically in more recent years, primarily since 2009. Consider the history of exemption level over these select years-
- 1979- $600,000 exemption level with a 55% maximum tax rate
- 2002- $1,000,000 exemption level with a 50% maximum tax rate
- 2004- $1,500,000 exemption level with a 48% maximum tax rate
- 2006- $2,000,000 exemption level with a 46% maximum tax rate
- 2009- $3,500,000 exemption level with a 45% maximum tax rate
- 2010- $5,000,000 exemption level with a 35% maximum tax rate (optional tax rate year)
- 2017- $5,490,000 exemption level with a 40% maximum tax rate
- 2018- $11,180,000 exemption level with a 40% maximum tax rate
If your estate plan was crafted 15 to 20 years ago and your estate was valued at $1,000,000 or more, then there is a probability that your plan relies on advanced planning techniques designed to reduce your tax liability. But your plan is probably based an old law. The result of using tax avoidance tools as significant components of an estate plan is that the estate plan might not satisfy a person’s other estate planning wishes, goals and concerns. In other words, an estate plan can have less than desirable results, if tax avoidance is a driving factor in the plan. If your estate plan is based on tax avoidance, because of the lower exemption levels in the 2000’s, it is probably time to revisit your plan.
Relief in 2011
Under the old law, the lower exemption levels often meant that an estate plan had to be creative in order to protect significant assets, maximize exemptions and reduce the amount of estate taxes due. Under old exemption levels, many people used trusts to try and avoid paying estate taxes. Estate planning tools such as pre-planned annual gifts, which gifts are nontaxable under the annual exclusion rule, and credit shelter trusts were used to maximize the value of the deceased spouse’s unused estate tax exemptions.
Then, in 2011, the “Portability Rule” was adopted, making planning for married couples much easier. The “Portability Rule” allows the surviving spouse to use any of a deceased spouse’s unused estate tax exemptions in the surviving spouse’s own estate, also became available as a tool for estate planning. Effectively, the “Portability Rule” doubles the exemption amounts for married couples.
The 2018 Exemption Level
The new law and its significantly higher $11.18 million exemption level allow many individuals the opportunity to alter their old estate plans in order to further maximize wealth transfers to loved ones with less regard for avoiding taxes. In other words, tax planning is less significant under the new law, meaning other factors may now outweigh tax concerns and may trigger the desire (or option) to modify older estate plans that were structured around the old tax laws. An estate plan may now be able to utilize different estate planning tools, while still reducing the estate taxes owed, taking advantage of stepped-up basis rules and preserving more of the estate for future generations.
In some instances, where annuals gifts were effectively a requirement in order to ensure that the estate did not exceed the old lower exemption levels, gifts may not be necessary or desired any longer, as the estate will not meet or exceed the $11.18 million exemption. Or perhaps assets that were originally placed in credit shelter trusts in order to take advantage of the deceased spouse’s unused estate tax exemptions would now be more beneficial as large gifts to children and grandchildren during the donor’s lifetime instead of at death, especially gifts that exceed the annual exclusion amounts. In 2018, the annual exclusion for gifts also increased from $14,000 to $15,000 per donor per donee, making gifting more appealing in some cases.
Time to Review Your plan
If your current estate plan relies on the use of the Portability Rule, it may be a good idea to review your plan to determine if it still is working to meet your goals. For many who relied on the Portability Rule, this tool may now be irrelevant as many individuals will not have an estate in excess of $11.8 million.
The new exemption levels, combined with the 2012 repeal of Indiana’s inheritance tax laws, Transfer on Death Deeds, and other tools make this a perfect time to reassess or begin developing your estate plan. Each individual’s circumstances are unique and are likely to change over time. Keep in mind that estate planning is not a “one time” event. Estate plans should be reviewed and revised as the law evolves and circumstances change as we progress through various stages of life. Your estate plan should be reviewed and revised periodically to ensure that it can still deliver on your overall goals, while still protecting the value of your assets.
If you or someone you know needs advice about your estate plan, please contact Griffith Xidias Law Group for a free consultation. Our phone number is (317) 663-0650, or visit us at 777 Beachway Drive, Suite 102, Indianapolis, IN 46224 or at www.indybizlaw.com.
Stay tuned for our next article when we discuss more on why you should have an estate plan for you and your loved ones.