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UPDATE – How It’s Made: Tax Reform and Estate Planning

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To view our prior post on tax reform click here.

A reconciled version of the Tax Cuts and Jobs Act (the “Act”) has passed the House of Representatives and the Senate, by votes of 224 to 201 and 51 to 48, respectively, and President Trump has signed the Act into law.  Effective January 1, 2018, the Act primarily alters the income tax landscape for corporations and individuals, but has significant implications for the United States estate and gift tax regime.

The Act increases the basic lifetime exclusion amount from $5,000,000.00 to $10,000,000.00, annually indexed for inflation for each year from 2011.  The increase is based on a cost of living adjustment.  The lifetime exclusion is the total value of assets than an individual may transfer during their lifetime and at death without paying estate or gift tax.  A gift in excess of the annual exclusion, $15,000.00 in 2018, will reduce that individual’s lifetime exclusion amount by the excess amount.

The IRS will release the official increase at a future date, but currently an individual should be able to transfer $11,200,000.00, assuming no prior gifts were made, without paying any estate or gift tax.  Furthermore, changes to the tax code in 2012 made portability permanent which allows one spouse to use another spouse’s unused exclusion amount, thus allowing a married couple to transfer up to $22,400,000.00 in 2018 tax free.

While the Act significantly increases the lifetime exclusion, the annual gift exclusion remains unchanged at $15,000.00 for 2018.  Gifts to one person in excess of $15,000.00 during one calendar year will result in the transferor utilizing a portion of their lifetime exclusion and requiring the transferor to file a gift tax return.

So what’s the bad news?

Like many of the income tax reductions, the increase in the lifetime exclusion is not permanent.  While all laws are subject to the whims of the governing party, by the Act’s own terms, the increased lifetime exclusion sunsets on December 31, 2025 and returns to the prior $5,000,000.00, base lifetime exclusion amount.  In order for Republicans to pass the bill without threat of a Democrat filibuster, the majority of the Act needs to expire in 10 years or less.

In light of these changes, it may be wise to have your estate plan reviewed and possibly revised.  An estate plan should not be a static set of documents that are prepared and then locked away for years.  Estate plans should be reviewed every few years and particularly after changes in life circumstances, finances, and changes to the tax code.

Now is the perfect time to get your estate plan in order.  If you would to establish an estate plan or have your current one reviewed, contact one of the estate planning attorneys at Young Moore.

W. Andrew Fletcher practices with the firm’s business law and estate planning & administration team. He works closely with clients to prepare plans that meet each client’s individual goals and advises fiduciaries administering trusts and estates. Contact Andrew at directly at (919) 861-5124 or Andrew.Fletcher@youngmoorelaw.com.

The information contained in this article is of a general nature and is not intended as, nor should it be relied upon for, legal advice.  No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.