A Letter to our Clients Re the Tax Cuts and Jobs Act

by Abby C. Boyd

Dear Friends and Colleagues,

On December 22, 2017, Public Law No. 115-97, introduced in Congress as the Tax Cuts and Jobs Act, (the “Act”) was signed into law.  The Act makes the following changes to federal estate, gift, and generation-skipping transfer taxes. 

The Act doubles the estate and gift tax applicable exclusion amount and the GST exemption amount, from $5,000,000 to $10,000,000.  These amounts are indexed for inflation.  Accordingly, the applicable exclusion amount for an individual in 2018 is estimated to be $11,180,000.  Married couples have a combined exclusion amount estimated to be $22,360,000 in 2018 based on exemption portability.

The Act “sunsets” on December 31, 2025.  This means that the Act’s higher applicable exclusion amount will apply to estates of decedents who die on or before December 31, 2025.  On or after January 1, 2026, unless Congress enacts additional legislation, the applicable exclusion and GST exemption amounts will return to pre-2018 levels, i.e., $5,000,000 for an individual, indexed for inflation.

Individuals are not likely to face a gift tax “claw back” problem.  A “claw back” could exist if an individual chooses to make large gifts prior to 2026 using the higher exclusion amount and that amount then returns to pre-Act levels.  The Act directs the Secretary of Treasury to issue regulations to prevent such a claw back, although such regulations have not yet been issued. 

In addition, the annual gift tax exclusion amount for 2018 is $15,000 per donee.  The exclusion applies to a single gift of $15,000 or to several gifts to the same donee having a combined value that is less than or equal to $15,000.   Married couples may make annual exclusion gifts to the same donee, together transferring $30,000 to as many donees as they wish without gift tax consequences.  However, depending on how a married couple makes these gifts, a gift tax return may be required to elect to use “gift-splitting.”

The 2018 increases to the annual gift tax exclusion and the applicable exclusion amount for the estate tax and generation-skipping transfer tax may present planning opportunities, especially if you want to make large gifts during your lifetime.

Due to the increase in the estate tax exclusion and GST exemption amounts under the Act, you should also consider whether it is necessary to revise your estate planning documents so that they continue to achieve your goals.  This is particularly true if your current estate planning documents create trusts that may no longer be desired, or if your documents rely on a “marital deduction formula clause” in creating a marital and family trust structure at your death.

The Act also made significant changes to federal income tax laws.  This letter does not address those changes.  You should consult your tax advisor if you have questions about the Act’s income tax provisions.

Even if you are not affected by the changes made to federal estate, gift, and generation-skipping transfer taxes, your estate planning documents should be reviewed periodically to confirm they continue to reflect your wishes.  Changes in personal circumstances, financial conditions, or the law may make it necessary or advisable to revise your estate planning documents.  

Please contact us if you have any questions about your estate plan or you would like to update your estate planning documents.