President Trump signed the Tax Cuts and Jobs Act of 2017 (“TCJA”) on December 22, 2017. Since most of the TCJA sunsets on December 31, 2025, the TCJA is inherently temporary.
What Changed. The TCJA changed many aspects of the Internal Revenue Code (“IRC”). As regards estate tax, the following key points apply –
- The applicable exclusion amount (the “AEA”) is now $11,200,000 (up from $5,600,000)
- The generation-skipping transfer tax and gift tax exemptions are also now $11,200,000
- The federal estate, gift, and generation-skipping transfer taxes have not been eliminated
- The federal estate and gift tax rate remains a level 40%
- A married couple in 2018 has roughly $22,420,000 in combined estate and gift tax exemption
Who Should Do Tax-Driven Estate Planning Now? The short answer is absolutely everyone with more than $5,600,000 in combined assets. The longer answer is most people, even if their assets are below $5,600,000. The why is two-fold:
- It is a certainty that the TCJA will either sunset, or be changed earlier. Any change could introduce an AEA that is less than $5,600,000 (it was $1,000,000 as recently as 2001).
- The next generation will pay estate tax on inherited assets absent tax-protective trusts.
What Kind of Estate Planning? Estate planning under the TCJA should:
Address the sunset of the TCJA at the end of 2025
Balance the relative benefits of federal estate and generation-skipping transfer taxes with basis step-up
Consider the tax law changes that could occur over the lifetime of the next generation
Include a gifting program — the TCJA offers a limited time opportunity to gift $11,200,000 of assets on a federal estate, gift, and generation-skipping transfer tax-free basis. With proper trust design, we can keep the benefit of the gift within the marital unit.