On December 22, 2017, President Trump signed H.R. 1, informally known as the Tax Cuts and Jobs Act. It includes a big, but temporary, reduction in transfer taxes.
From 2011 through 2017, the first $5 million (plus an inflation adjustment) of property transferred by U.S. citizens and residents was exempt from estate and gift tax. Additional transfers were taxed at rates of up to 40%. Certain generation-skipping transfers were (and still are) taxed at substantially higher rates.
New Public Law 115-07 does not eliminate the estate tax, the gift tax, or the generation-skipping transfer tax. Instead, it temporarily doubles the exemption amount to $10 million. With the inflation adjustment, U.S. citizens and residents may give or leave a total of $11.2 million. That’s $22.4 million for a married couple. The doubled exemption amount applies to estates of decedents who die in 2018 through 2025. The tax rates are unchanged.
After 2025, the exemption provisions of P.L. 115-07 expire, and the tax-free amount reverts to $5 million, but with adjustments for inflation after 2011. Even assuming no further inflation, the exemption in 2026 will be $5.6 million.
There are two ways to exploit the generous but temporary doubling of the exemption amount: die or give away millions, and before 2026. Because the changes are temporary, I don’t recommend my clients change their wills and trusts. Single individuals leaving as much as $1 million per child should still include descendants trusts.
For couples worth $2 to $5 million, I still recommend spouses leave all to each other, and the remainder to the children, subject to tax-planned descendants trusts.
For couples worth $5 to $10 million, each spouse still needs tax-planned bypass trusts for transfers to the surviving spouse, as well as descendants trusts for children.
Those with the resources to give away $5–10 million probably don’t need to revise their existing wills and trusts, but might consider limited partnerships or new gift trusts. However, visit your financial advisor first, not your lawyer. A major gift makes no sense if you cannot afford it.
When I was born, the exemption amount was only $60,000. That number still applies to foreign taxpayers not domiciled in the U.S. that gift or leave U.S. assets. Estate tax reform does not extend to nonresident aliens.
This article was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.
