During the 1992 Presidential election, James Carville coined the phrase "It's the economy, stupid".  It was arguably one of the key campaign slogans that helped President Clinton win the election.

The IRS defines the Estate Tax as "a tax on your right to transfer property at your death.  It consists of an accounting of everything you own or have certain interests in at the date of your death" (https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax).  It goes on to say that once you have accounted for the Gross Estate, certain deductions are allowed such as mortgages or other debts to arrive at the Net Estate.  From there, lifetime taxable gifts (beginning with gifts made after 1977) are added to this number and the tax is computed.  This tax is then reduced by the available unified credit to calculate the tax due.  Refer to Form 706 below as a very simple example of this calculation.

It is imperative that the Gift Tax also be taken into consideration.  The Gift Tax is defined by the IRS as "a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.  The tax applies whether the donor intends the transfer to be a gift or not".  This tax is paid by the transferor, not the recipient of the gift, for the year in which the gift was made.  IRS Form 709 is used to report gifts.

There are two levels of exemptions or exclusions for the gift tax.  In general, the IRS allows any taxpayer to gift up to $15,000 per year in 2018, also known as the annual exclusion amount, without having to file a gift tax return.  These gifts are totally tax free to the recipient and no gift need be reported nor tax paid by the donor.  Any gifts over this amount require the filing of Form 709 to report the taxable gift.  However, a second level of exclusion affords a taxpayer the ability to make taxable gifts up to the lifetime exemption amount without paying taxes.  This lifetime exemption is the same amount as the basic exclusion under Form 706, line 9a, for the estate tax return.

You see, the IRS really does not care if your clients use their lifetime exemptions while they are alive or at the time of their deaths.  A taxpayer only need report gifts made over the annual exclusion amount  during his or her lifetime, thereby reducing what is available for exclusion at death.

Let's consider an example. If the current lifetime exemption is $5,200,000 per individual (as it is for 2018) and the taxpayer has made gifts of $3,000,000 during his or her life, these gifts would have the effect of reducing the "basic exclusion amount" (line 9a on Form 706) to $2,200,000.  In actuality, taxable gifts during life are included on line 4 of Form 706, but the taxable impact has the same effect as described above.

It is important to emphasize that any gifts made  over the course of the taxpayer's life have the opportunity for a LIFETIME  of growth OUTSIDE of   his or her estate.  At AgencyONE, we see many advisors recommend  that their clients move assets such as real estate, privately held stock, or other equities that are experiencing rapid growth to a trust,  which removes the asset from the estate  and thereby removes any future growth from the estate as well.  We also see many advisors recommend that assets be transferred to a trust and then  leveraged to purchase significant amounts of life insurance inside the trust.  The decision on whether to purchase life insurance is not "all or nothing".    Life insurance can simply be one asset in the basket of many assets in a trust.

Why is all this important?  The Tax Reform Bill considers doubling the lifetime exemption to $11,200,000 per individual in 2018 ($22,400,000 for married couples) and indexed for growth in the future.  This massive tax break can reduce a taxable estate at death (assuming it is still available at that time) or it can be used TODAY to move assets out of an estate along with all future growth. 

Estate, Gift and Generation Skipping taxes have come and gone since their inception (220 years).  Exemptions have increased and decreased, and tax rates have varied drastically.  Make no mistake, this increase in the lifetime exemption is a GIFT but, as our previous ONEIdea concluded, it may be temporary.  So don't wait too long to take action, as it may be gone before you know it!