The tax bill recently passed by the U.S. Congress and signed by President Trump retains the gift and estate tax, but substantially limits its reach. The new tax legislation represents a dramatic change to our transfer tax system and may provide substantial estate and gift tax reductions for wealthier Americans (see below on timing).
Under the new law the estate/gift tax rates remain unchanged at 40 percent, but starting in 2018 the amounts exempted from federal estate tax, gift tax and GST tax have all been doubled, from $5.6 million per person (indexed for inflation) to $11.2 million per person (indexed for inflation).
Those dramatic increases in the gift/estate tax exemptions yield significant transfer tax savings for some Americans who make large gifts and for others who stand to inherit from very large estates. However, these changes are not permanent. These enhanced exemption amounts will all expire at the end of 2025. Without further legislation, the enhanced exemption amounts will revert to 2017 law with an exemption amount of $5.6 million per person (indexed for inflation).
Significantly, the step-up in income tax basis for assets transferred at death (the increase in an asset’s tax basis from its cost to its fair market value on the date of the owner’s death) continues under the new law.
The increased federal exemptions ($11.2 million per person and potentially $22.4 million for a married couple) dramatically reduce the number of people paying federal estate or gift tax on transfers during lifetime or at death that occur in the 2018-2025 time period. However, the Minnesota estate tax applies at lower limits and should also be considered in your estate plan.
Client should review their estate plans and current gifting strategies/opportunities in order to make sure they capture any desired benefits and avoid any negative consequences of the new federal and Minnesota estate tax laws.
For example, many older estate plans have provisions that are intended to take advantage of the previous exemption amounts. Clients will want to make sure that their estate plans are still appropriate in light of the new, increased exemption amounts.
More aggressive gifting strategies may take advantage of the increased exemptions while they last. However, the income tax basis of any assets gifted during lifetime carries over to the recipient of the gift. Because the new tax law preserves the potential full step-up in basis that is available upon the death of an individual, in some cases it may make more sense to transfer the asset at death (to allow the recipient to avoid incurring any income tax liability related to the future sale of the asset) rather than through a gift.
In view of the new federal estate tax laws, we strongly encourage clients to contact us for a review of their estate plans.
————- Dave Libra, Bill Lapp, and Alyssa Troje