Articles

Tax Reform Exempts More High-Net-Worth Families from the Dreaded Estate Tax by Rick Bazzani, CPA


Posted on August 15, 2018 by Rick Bazzani

While the Tax Cuts and Jobs Act (TCJA) signed into law in December of 2017 did not make many adjustments to the existing gift, estate and generation-skipping transfer tax regimes, what it did do beginning on Jan. 1, 2018, is significant.

Doubles the Estate and Generation-Skipping Transfer Tax Exemption

Under the new law, fewer taxpayers will need to worry about paying federal estate tax. In 2018, the exemption doubles from $5.6 million in 2017, to $11.18 million for single-filing taxpayers, and $22.36 million for married couples filing joint tax returns. The amount of the exemption will be indexed for inflation until 2026, when it is set to return to its 2017 pre-tax reform limit.

What this means is that individual taxpayers may transfer up to $11.18 million in assets to their heirs in 2018 (or up to $22.36 million for married couples filing jointly), either during life or at death, without incurring federal estate taxes. Anything above the excluded amounts is subject to the same 40 percent flat tax rate that has been in effect since 2013.

Retains Step-Up Basis for Assets Transferred at Death

Beneficiaries who inherit the assets of a deceased taxpayer between 2018 and 2026, when the estate tax provisions of the TCJA are set to expire, will continue to receive a step-up in the value of those assets. Therefore, a beneficiary’s costs basis in an inherited asset will be readjusted upward to the asset’s fair market value at the time of the benefactor’s death. This allows beneficiaries to minimize or even eliminate their exposure to capital gains tax when they sell inherited assets in the future.

Maintains Annual Gift Tax Exclusion

Giving gifts allows taxpayer to shield their wealth from future estate tax liabilities by removing assets and their future appreciation value from their taxable estates. Under the new tax laws, taxpayers may annually gift up to $15,000 in cash or assets to as many people as they choose free of transfer taxes as well as an unlimited amount of gifts in the form of tuition and medical expenses paid directly to a qualifying institution on behalf of another individual. For married couples, the gift tax exclusion in 2018 is $30,000. Any gifts above these amounts will be subject to 40 percent tax rate.

 Reduces Income Tax Brackets for Trusts and Estates

In addition to lowering the existing seven income tax brackets, the TCJA also reduces the top bracket for estates and trusts to 37 percent on taxable income in excess of $12,500.

Warnings and Planning Opportunities

Despite the generous provision relating to the estate tax, the new law currently calls for the increased exemptions to expire on Dec. 31, 2025, and revert to their 2017 limits in 2026.

Without the ability to look into a crystal ball and know what Congress will do over the next eight years, high-net-worth families must plan appropriately under the guidance of experienced financial advisors and tax accounts. This may include establishing trusts, if none already exists, and maximizing gifts to these estate planning vehicles. These gifts effectively transfer assets out of an individual’s taxable estate to family members or other named beneficiaries and allow grantors to use trust assets to fund life insurance policies or, in some instances, pay income tax liabilities while they are alive.

 

About the Author: Rick D. Bazzani, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides individuals with a broad range of tax-efficient estate-, trust- and gift-planning services. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

 

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service


Pin It on Pinterest