Gift and Estate Tax Changes Under the Tax Cuts and Jobs Act: Transfer More Wealth Tax-Free

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a wide array of changes to most areas of the tax law beginning with the 2018 tax year, including gift and estate taxes. Under the Act, taxpayers have the opportunity to reevaluate their gifting techniques and estate plans in order to maximize tax savings and transfer more of their wealth tax-free.

ANNUAL EXCLUSION

The 2019 annual gift exclusion is $15,000. This exclusion is the amount that can be gifted per person per year tax-free. In addition, married couples can elect to split gifts. Utilizing this strategy, married taxpayers can gift up to $30,000 to an individual in 2019 before a gift tax return is required. Annual gifting is an excellent way to reduce the value of a taxpayer’s gross estate over time, thereby lowering the amount subject  to estate tax.

LIFETIME EXEMPTION

The 2019 lifetime gift exemption is $11,400,000 (indexed for inflation), which has increased significantly from the $5,490,000 exemption amount in 2017. This exemption is the total amount that can be gifted over the course of a donor’s entire lifetime tax-free. The Act more than doubles the lifetime exemption, but it is scheduled to sunset at the end of 2025 unless Congress renews this provision. If not, the prior exemption amount will be restored, as indexed for inflation.

Year-end 2025 is not the only deadline to consider. The 2020 presidential election could change the landscape for estate planning and reduce the lifetime exemption prior to 2025. For those considering using the increased exemption now, the IRS has issued regulations which confirm that gifts made utilizing the enhanced gift tax exemption will not be clawed back if the exemption is reduced.

PORTABILITY ELECTION

The portability election remains under the Act. It is an imperative planning tool for taxpayers, especially if the death of a spouse occurs while the increased exemptions are in place.Portability allows the second spouse to have the benefit  of the  deceased spouse’s $11.4 million exemption, even if the second spouse dies when a lower exemption amount is in effect. Keep in mind that an estate tax return will need to be filed when the first spouse dies in order to make the portability election, even if
the gross estate is under the filing threshold. States may have different rules related to portability; therefore it is important to consider these rules as well to avoid wasting this election.

BASIS STEP-UP

No changes were made under TCJA to these provisions, which allow a step-up in tax basis for most inherited appreciated assets (excluding retirement accounts and annuities). Generally, basis is the amount paid for an asset. Upon death, the beneficiaries are allowed to increase the tax basis of an inherited asset to the fair market value at the date of the decedent’s death. This is a taxpayer friendly provision that allows beneficiaries to be taxed on a much smaller capital gain, or none at all, should the inherited assets be greatly appreciated and the new owner desires to sell.

ESTATE PLANNING CONSIDERATION

Although individuals have until December 31, 2025, to take advantage of the increased gift tax exemption, making gifts sooner rather than later will allow future appreciation of gifted assets to be removed from a future estate. An estate plan must, however, carefully weigh the loss of a step-up in income tax basis for any gifted asset when compared to the step-up in basis that would result were assets held until death and included in an estate. This is especially relevant for those who do not anticipate having estates that exceed the exemption amount of $11.4 million for single people and $22.8 million for married couples.

Married people with estates below the threshold amount should focus on the following tax and non-tax considerations:

• Whether assets should be  left outright or in trust for the surviving spouse.
• Maximizing step-up in basis on the surviving spouse’s death.
• Taking advantage of portability.

SECTION 199A AND TRUSTS

The TCJA created a new Section 199A deduction, which allows certain taxpayers a 20% deduction on qualified business income (QBI). The 199A deduction has taxable income limitations, based on the taxpayer’s total income. In order to maximize the 199A deduction, taxpayers should consider utilizing non-grantor trusts, which are separate taxpayers, each eligible for the 199A deduction. (The proposed regulations under Section 199A prevent a taxpayer from establishing multiple trusts with the same grantor and beneficiaries for the principal purpose of avoiding income tax).

RECOMMENDATION

Now is  a  good time to  meet with your Marcum tax professional to consider the best ways to make additional gifts using the increased exemption, as there are benefits to making the gifts now as opposed to waiting until the exemption is about to expire.