While the new tax act passed at the end of 2017 was primarily focused on income taxes, it also made a temporary change to the estate and gift tax laws. Specifically, the new tax act temporarily doubles the exemption amount for estate, gift and generation-skipping taxes from the $5 million base to a new $10 million base, but only until 2026. Because the exemption amount is subject to adjustments for inflation and is tied into the prior tax law, people who die in 2018-2025 will be able to leave at least $11,200,000 completely free from any estate taxes and may be able to make gifts of that entire amount in that period without incurring any gift taxes as well. I note that we await clarification on how gifts made in this period will be handled. On the other hand, people who die in or after the year 2026, when the law “sunsets” are back to an exclusion amount of $5 million as adjusted for inflation.
Although the new estate tax changes are temporary, it remains clear that if you have not updated your estate plan since 2012, you likely have important planning to address. The exemption amounts, even at the post 2025 levels of $5 million indexed for inflation, together with the interplay of capital gains and income taxes means that most people (99.8% of taxpayers, according to government statistics) should have an estate plan focused primarily on “people” planning, income
tax planning and tax basis planning, and not estate tax planning. As an example, you may have a trust that allocates all assets to a credit shelter trust that continues for your spouse’s life and passes to your children at the spouse’s death. For most people, this is no longer a good tax strategy as it sacrifices potential capital gains tax savings and flexibility for a benefit that is no longer necessary. And if your credit shelter trust does not provide for your spouse, but rather passes directly to your children, you may have just disinherited your spouse by mistake!
On the other hand, those with greater estates may be advised to look at options available to leverage the temporary expansions in the estate and gift tax credit to make gifts and engage in other planning to be ready for 2026 when the “sunset” comes. Of course, estate, income and capital gains taxes are only a part of a good overall estate plan. Focusing on appropriate creditor, marital and “people” planning is key to the best outcome for your family. Since we can optimize all of these factors under the new tax act only on an individualized basis, we strongly recommend you have a conversation with your estate planning attorney now.