On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act. This act accomplished several things. One large accomplishment of note is the fact that it opened the door on several outstanding opportunities for individuals and families working to implement or improve their estate plans. While some of these do have time limits placed on them, there is still time to take advantage before the window of opportunity closes.
Income Tax Basis Planning
When it comes to assets, a high tax basis is currently the better option. Grantor trusts could benefit more from exchanging any assets that have a low tax basis (compared to fair market value) for assets that have a higher tax basis. This should be done during the life of the grantor. Since this sort of swap, between a grantor trust and an individual, is not considered an actual sale (as far as the IRS is concerned), it will not create any sort of income tax liability. As the law is currently written, when that individual dies any of the low basis assets they own will be increased in basis. They will be brought up equal to whatever the fair market value is at the time they pass.
The Importance of Annual Gifts
One area that was especially helped through the passage of the Act is that of annual gifting. According to the language of the Act, up to $15,000 per recipient may be gifted by individuals without causing the gift tax to come into play. Married couples can make gifts doubling that amount, $30,000, if they decide to split gifts. No matter the value of the gifts, United States citizens will not be taxed on any gifts to their spouse. Also, noncitizen spouses may be gifted up to $157,000 each year without incurring a gift tax on the transfer.
Exemptions from Estate and Gift Taxes have been Temporarily Increased
One of the issues with large transfers of property, whether upon an individual’s death or if a lifetime gift, is the tax rate that is applied. Those that pass the lifetime exemption get taxed up to 40% if they are not transfer tax-exempt. During its initial passage, the Act doubled the exclusion amount to $10 million dollars. In January of this year however it increased again thanks to inflation adjustments. It is now setting at $11.58 million per individual. This means that a couple who plans appropriately could transfer double that amount without having to worry about triggering the transfer tax. This is a temporary issue, however. While it is set to implement new inflation-driven increases through 2025, this will end.
Unless new laws are enacted, as of January 1, 2026 this lifetime exemption will drop back down to $5 million per individual. Luckily, the IRS has said that anyone using this exemption any time between 2018 and 2025 will not be affected when the exemption levels revert to the original amount of $5 million. The Treasury Department has also taken steps to work with the IRS in passing regulations ensuring that no clawback of gifts that are made on or before December 31, 2025 whether the lifetime exemption decreases or not.
In our next article we’ll take a look at more on the exemption increase and other benefits of the Act. As always, if you have questions about how any current or upcoming laws may affect your estate, do not hesitate to contact us!
