What are the gift and estate tax rules after tax reform?
By Mark FisselPosted on April 24th, 2018
The Tax Cuts and Jobs Act, signed into law in December 2017, approximately doubled the federal gift and estate tax basic exclusion amount to $11.18 million in 2018 (adjusted for inflation in later years). After 2025, the exclusion is scheduled to revert to its pre-2018 level and be cut approximately in half. Otherwise, federal gift and estate taxes remain the same.
Gift tax. Gifts you make during your lifetime may be subject to federal gift tax. Not all gifts are subject to the tax, however. You can make annual tax-free gifts of up to $15,000 per recipient. Married couples can effectively make annual tax-free gifts of up to $30,000 per recipient. You can also make unlimited tax-free gifts for qualifying expenses paid directly to educational or medical service providers. And you can make deductible transfers to your spouse and to charity. There is a basic exclusion amount that protects a total of up to $11.18 million (in 2018) from gift tax and estate tax. Transfers in excess of the basic exclusion amount are generally taxed at 40%.
Estate tax. Property you own at death is subject to federal estate tax. As with the gift tax, you can make deductible transfers to your spouse and to charity; there is a basic exclusion amount that protects up to $11.18 million (in 2018) from tax, and a tax rate of 40% generally applies to transfers in excess of the basic exclusion amount.
Portability. The estate of a deceased spouse can elect to transfer any unused applicable exclusion amount to his or her surviving spouse (a concept referred to as portability). The surviving spouse can use the unused exclusion of the deceased spouse, along with the surviving spouse’s own basic exclusion amount, for federal gift and estate tax purposes. For example, if a spouse died in 2011 and the estate elected to transfer $5 million of the unused exclusion to the surviving spouse, the surviving spouse effectively has an applicable exclusion amount of $16.18 million ($5 million plus $11.18 million) to shelter transfers from federal gift or estate tax in 2018.
How has tax reform affected the generation-skipping transfer tax?
The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the federal generation-skipping transfer (GST) tax exemption to $11.18 million in 2018 (adjusted for inflation in later years). After 2025, the exemption is scheduled to revert to its pre-2018 level and be cut approximately in half. Otherwise, the federal GST tax remains the same.
The federal GST tax generally applies if you transfer property to a skip person. A skip person is someone who is two or more generations younger than you (for example, a grandchild). The GST tax may apply in addition to any gift or estate tax. Similar to the gift tax provisions, annual exclusions (up to $15,000 per recipient in 2018) and exclusions for qualifying educational and medical expenses are available for GST tax. You can protect up to $11.18 million (in 2018) with the GST tax exemption. Transfers in excess of the GST tax exemption are generally taxed at 40%.
A GST generally occurs on a transfer that is subject to federal gift or estate tax and made to a skip person, or a transfer to a trust if all the beneficiaries with an interest in the trust are skip persons. A GST may also occur on certain distributions from trusts to skip persons. Additionally, a GST may occur when an interest in a trust terminates, and skip persons then hold all interests in the trust.
Unlike with the gift and estate tax applicable exclusion amount, the GST tax exemption is not portable between spouses. The estate of a deceased spouse cannot transfer any unused GST tax exemption to the surviving spouse.
Note: An early version of the legislation proposed approximately doubling the gift and estate tax basic exclusion amount and the GST tax exemption for 2018 to 2024. After 2024, the estate tax and the GST tax would have been repealed. The gift tax would not have been repealed, although the top gift tax rate would have been reduced from 40% to 35% after 2024. However, the only provision that made it into the final legislation was the doubling of the gift and estate tax basic exclusion amount and the GST tax exemption for 2018 to 2025.
Source: Broadridge