While there were many changes made under the Tax Cuts and Jobs Act (TCJA), one of the biggest changes for estate and gift planning was the increase in the federal estate, gift and generation-skipping transfer (GST) tax exemptions for individuals. Prior to the TCJA’s enactment, individuals had a $5 million (indexed for inflation) lifetime exemption for federal estate, gift and GST tax. Under the TCJA, the lifetime exemption increased to $10 million and is indexed annually for inflation. For the 2019 tax year, the exemption is $11.4 million (or $22.8 million for married couples). This means a taxpayer can gift up to $11.4 million during their lifetime and not be subject to gift tax on the transfers.
Estate & Gift Opportunities
The current annual exclusion for gifts made during 2019 is $15,000 per donee. Taxpayers can take advantage of the annual exclusion by gifting up to $15,000 per donee without using any of their lifetime exemption. A married couple can double the amount of gift to each donee by electing to split gifts on timely filed gift tax returns.
The new tax law provides taxpayers with a unique opportunity to make additional gifts during life and transfer a significant amount of wealth out of their estates. Taxpayers who used their entire lifetime exemption under previous law now have an additional opportunity to make large gifts to reduce the size of their estate.
Because the increased exemption is temporary and scheduled to sunset after 2025, taxpayers should consider using it now to avoid missing out on this opportunity. For additional information about the increased exemption under the TCJA, read this BKD Thoughtware® article.
Another planning opportunity relates to the election to split gifts between a taxpayer and spouse. Historically, it’s been common for a married couple to make the election to split gifts to reduce the amount of lifetime exemption being used by a taxpayer. With the election to split gifts, the taxpayer and spouse would split the amount of exemption being used for that tax year. With the increased exemption amount being set to expire after 2025, there could be a planning opportunity in deciding whether or not to split gifts during this time.
Example: Husband makes a gift of $11.4 million to a donee during 2019. Husband and Wife haven’t used any of their lifetime exemption prior to 2019. Husband and Wife can make the election to split gifts and use $5 million of each of their lifetime exemptions. If the exemption reverts back to $5 million in 2026 (as scheduled under current law), both taxpayers would have used their entire exemption and would have none remaining for future gifts. If Husband and Wife don’t make the election to split gifts, Husband would use his entire $11.4 million of exemption. If the exemption reverts back to $5 million in 2026, Husband would have zero exemption remaining, but Wife would have her entire $5 million exemption remaining to use on future gifts.
Other Planning Opportunities
Taxpayers could use other planning techniques, such as sales to intentionally defective grantor trusts or gifts to grantor-retained annuity trusts, which can be used to remove future asset growth from a taxpayer’s estate. For taxpayers who may be concerned about retaining access to their wealth during their lives, there are unique strategies to consider, such as funding a spousal lifetime access trust, which would provide a taxpayer with an opportunity to remove assets from their estate while not losing total control of the assets during their life.
Due to the increased exemption amount, fewer taxpayers will be subject to the estate tax. For those taxpayers who anticipate having a combined estate less than the original $5 million exemption, traditional estate planning may not be the most tax-efficient approach and planning for income tax issues may have a bigger impact. Assets held by an individual at their death—and includible in their estate—receive a step-up in basis to the fair market value at that time, while assets gifted during the taxpayer’s lifetime will have a carryover basis in the hands of the donee. This would benefit heirs receiving assets from the estate, as the increased cost basis could reduce or eliminate capital gains if those assets are later sold.
We understand every taxpayer’s situation is unique and there’s no one-size-fits-all approach. Estate planning documents should be reviewed regularly with your CPA and estate planning attorney to assess whether your goals and desires are met while also considering relevant tax law changes.
For more information, reach out to your BKD trusted advisor or complete the Contact Us form below.