The Tax Cuts and Jobs Act of 2017 (the “Act”) was recently signed into law and with it significant changes in the taxes our clients may pay. We will be providing a few summaries of some of the more substantial of these changes as well as some thoughts on how to respond to those changes. This article will focus on certain transfer tax changes enacted by the Act.
Since the Tax Relief Act of 2012, the federal estate tax exemption had been set at $5,000,000, as adjusted by the consumers price index, or $10,000,000 for a married couple. With inflation that amount had risen to $5,490,000 per person or almost $11,000,000 for a married couple in 2017. The new Act effectively doubles this exemption to $10,000,000 per person. In 2018 the inflation adjusted amount is expected to be slightly over $11,200,000 per person.
The effect of the new Act in this regard is that fewer people will have to pay the estate tax. Fewer family business and family farms will have to be sold or mortgaged to pay this tax.
The challenge is that by the law’s own terms this rise in the exemption amount reverts back to $5,000,000 in 2026. In addition, since the passage of the law by the Republican controlled Congress was by the slimmest of margins, if the composition of the federal government shifts sooner than 2026, the environment might be set for reduction in the exemption ahead of 2026.
As a result, planners are still trying to absorb the effect of the new law and how it will impact planning advice for the short term. Our initial thoughts are that the current planning techniques will still be helpful even for those whose estates’ values might be well below the new exemption thresholds because the exemption amounts for gift and generation skipping transfer tax exemption purposes also rose. Since all transfer tax exemptions rose, transactions and gifts that would have previously been a concern of the IRS to audit cannot result in tax. That alone should reduce the risk of audit and allow the statute of limitations to expire on gifts and transactions completed during the next few years. Therefore, we currently believe that structured gifts and sales will continue to be very beneficial.
On the other hand, a few of our clients will conclude that some of the structures of entities and trusts that were employed in the past do not appear needed so a simplification of their plan could be accomplished. We have frequently heard that our clients wish to have their plans as simple as possible for a surviving spouse or their children, while still meeting their desire to protect the assets.
If we can be of assistance in evaluating the new Act and its application to your specific circumstances, please give us a call.