On December 22, 2017, President Trump signed into law the tax bill known informally as the "Tax Cuts and Jobs Act" (H.R.1) (the "Act"). This article describes the Act's estate and gift tax changes.
Under the Internal Revenue Code, a gift tax is imposed on certain lifetime transfers under Code Section 2511, and an estate tax is imposed on certain transfers at death under Code Section 2001.
Under pre-Act law, the first $5 million (as adjusted for inflation in years after 2011) of transferred property was exempt from estate and gift tax. For estates of decedents dying and gifts made in 2018, this "basic exclusion amount" was $5.6 million ($11.2 million for a married couple).
Under the Act, Congress did not repeal the estate, gift and generation-skipping transfer taxes as originally proposed. For estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026, the Act doubles the base estate and gift tax exemptions amount from $5 million to $10 million (Code Section 2010 (c)(3), as amended by the Act's Section 11061(a)). The $10 million amount is indexed for inflation occurring after 2011, and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple). While the language in the Act does not mention generation-skipping transfers, because the generation-skipping transfers amount is based upon the basic exclusion amount, we anticipate the generation-skipping transfers will also see an increased exclusion amount.
The Act does not change the current income tax basis rules related to gifts and transfers at death. The recipient of a lifetime gift of appreciated property (the "donee") receives the donor's basis in the property (Code Section 1015(a), while the donee of the property transferred at death receives a new fair market value basis in the property referred to as a step-up in basis to the donee (Code Section 1014(a)(1)). This can be significant if the donee receives a low-basis appreciated asset during life and sells it, the donee will incur a capital gain. If however, the donor were to give the same property to the donee at death and the donee then sells it at that time, the donee will not incur a capital gain.
Estate planning for family wealth transfer purposes is primarily a question of determining the ultimate goals of the client. Thus, having a well thought out wealth transfer plan that builds in flexibility is highly beneficial when dealing with a changing tax environment as in the case of the Act, portions of which have an expiration date of December 31, 2025.
Friedman & Feiger, LLP is prepared to work with its clients in conjunction with evaluating their wealth transfer plans for purposes of the Act. Please contact Robert Feiger, Esq. at 972-450-7350