Under the new tax law, estate tax has not been repealed. However, there is relief for higher net worth individuals, business owners and people with large estates that have little or no liquidity who previously might have sold their assets to pay estate taxes.
Effective January 1, 2018, the new estate tax laws increased the lifetime exclusion from estate tax, gift tax and generation skipping tax to approximately $11,200,0001 per person from $5,490,000 per person. With a properly structured estate, a married couple now has exclusion from estate tax, gift tax and generation skipping tax of $22,400,000.2 The tax rates on any transfers in excess of these amounts is a flat 40% rate.
Also, starting in 2018, the annual gift tax exclusion is increased to $15,000. This higher amount can be given to any number of individuals without paying gift tax or using any portion of the lifetime exclusion for gift tax. Other than the annual gift tax exclusion, all other increased exclusions are temporary. They will expire after 2025.
What are the largest impacts of these changes?
Large estates will have more flexibility and the ability to make more excluded gifts.
If the estate is a non-taxable estate, the current estate planning documents may no longer be needed for estate tax planning and complex provisions may be able to be removed.
There may be increased flexibility to allow for better income tax planning after death for the benefit of the surviving spouse and children.
As the lifetime exclusion has doubled, estates that have little or no liquidity will not be forced to sell assets to pay estate tax. This will allow increased investment flexibility for families, estate planning attorneys and financial planners. Some individuals may no longer need a life insurance policy to pay estate taxes.
It’s a good idea to review estate plans after a tax law changes to take advantage of the differences. An experienced tax and estate planning attorney can review existing estate plans and make suggestions on how to maximize the benefits under the new tax laws.