Simmons Perrine Moyer Bergman PLC

2018 Federal Tax Act Update: Changes to Estate Tax, Gift Tax, and the Generation-Skipping Transfer Tax December 27, 2017

Related Professional(s): Paul P. Morf

As you have no doubt heard, we will enter 2018 with a new federal tax act in place.  There are a number of provisions that  may impact income tax planning (especially for farmers, business owners and those who have historically itemized their deductions), but today I want to focus on the changes that have been made to the federal transfer tax system (which encompasses the estate tax, the gift tax, and the generation-skipping transfer tax).  My summary is as follows:

1. All three of these taxes will continue to exist in 2018 and for the foreseeable future, and the tax-free amount will continue to be “unified” for all three transfer taxes, and will continue to be indexed to inflation and will therefore increase modestly each year. 

  • Gift and estate tax exemptions will continue to be “portable” between spouses, and generation-skipping transfer tax exemption will continue to be not portable between spouses. 

  • Gifts and bequests to charity and to a surviving spouse who is a US Citizen (or to a QTIP marital trust) will continue to be exempt from gift and estate tax. 

  • The annual exclusion to the gift tax will remain indexed to inflation (and will jump from $14,000 per beneficiary for 2017 to $15,000 per beneficiary for 2018).  Recall that annual exclusion gifts can be made to a 529 College Savings Iowa account and generate an Iowa income tax deduction, see details at www.collegesavingsiowa.com.  If you haven’t gifted $14,000 to each of your children and grandchildren in 2017, there is still time to do so (although not much).  

2. The big change is that the amount of these federal transfer tax exemptions will double as of January 1, 2018, and the “double exemption” amounts will remain in place through December 31, 2025.  On January 1, 2026, however, barring another act of Congress, this “double exemption” benefit will sunset and the estate and gift tax exemptions will return to what they would have been had this Act not passed. 

  • This “doubling” applies to lifetime gifts as well as to assets passing at death, and also applies to generation-skipping transfers (such as gifts to dynasty trusts).

  • In 2017, the amount each person could gift during life or bequeath at death was $5,490,000 ($10,980,000 for a married couple), and was scheduled to increase to $5,600,000 ($11,200,000 for a married couple) in 2018 due to inflation adjustments.   Under the new act, the 2018 exemptions will instead be $11,200,000 per person ($22,400,000 for a married couple). 

  • Under the new act, each person who had not used any of their exemption prior to 2018 could gift $11,200,000 in 2018 (or at any time prior to 2025) to whomever they wished without triggering any federal transfer tax, and a person dying in 2018 (or any time prior to January 1, 2026) with an estate of less than $11,200,000 would not pay federal estate tax.  However, in 2026, unless Congress acts again, the “doubling” of these exemptions will expire and each person’s exemption will revert to $5,600,000 (plus seven years of inflation adjustments).

I encourage you to schedule a meeting in 2018 for a wellness check regarding your estate plan. 

  • For some people, simplification may worth considering, but because this reform sunsets at the end of 2025, we will still strongly encourage you to include a contingent tax plan in your documents. 

  • On the other hand, I anticipate that clients with a net financial worth likely to grow beyond $6,000,000 (or $12,000,000 for a married couple) may consider harvesting some of their new gift tax and generation-skipping tax exemptions through 2018 gifts. 

  • Finally, I have already talked to several clients about implementing a “zero tax plan,” whereby any amount beyond $22,400,000 would pass to non-profit organizations rather than incurring a 40% tax.  For some people, $22,400,000 may be “enough” benefit to leave to their child (or children), and leaving any excess beyond this amount to charities of their choice may be a simple, zero-estate-tax solution. 

Hopefully I have left you with some food for thought.  Please feel free to call us in the New Year if you wish to discuss how these changes may impact your plan.  Until then, here’s wishing you a Happy New Year!

Paul P. Morf
Member

Simmons Perrine Moyer Bergman PLC
115 3rd Street SE, Suite 1200
Cedar Rapids, Iowa 52401-1266
Telephone: (319) 896-4012
Email: pmorf@spmblaw.com
www.spmblaw.com