2018 Year-End Estate Planning Update

by Verrill Dana LLP
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Federal Transfer Taxes
The Internal Revenue Service has announced the annual inflation adjustments for the 2019 tax year:

 

2017

2018

2019

Gift and Estate Tax Exclusion

$5,490,000

$11,180,000

$11,400,000

GST Tax Exemption

$5,490,000

$11,180,000

$11,400,000

Gift Tax Annual Exclusion

$14,000

$15,000

$15,000

Annual Exclusion for Gifts to Noncitizen Spouse

$149,000

$152,000

$155,000


Federal unified gift and estate tax exclusion increasing to $11,400,000:  As of January 1, 2019, an individual may give up to $11,400,000 (increased from $11,180,000 in 2018) during life or at death without incurring any federal gift or estate tax.  Married couples may give up to $22,800,000 (increased from $22,360,000 in 2018).  State death taxes paid are deductible from the federal gross estate for estate tax purposes.  Federal estate and gift tax are assessed, effectively, at a flat rate of 40%. 

IRS issues proposed regulations addressing clawback concerns: Absent further action from Congress, the unified gift and estate tax exclusion amount is set to be reduced back to approximately $5,000,000 per individual (adjusted upwards for inflation) in 2026.  On November 20, 2018, the Internal Revenue Service issued proposed regulations to protect taxpayers who make large gifts during the interim period where the higher exclusion amount applies (if it is not renewed or made permanent).  If these proposed regulations are adopted, in the event of a decrease in the unified exclusion, taxpayers dying in 2026 and beyond will not face a tax liability for lifetime gifts that were exempt from tax when made due to the increased exclusion amount available from 2018-2025.  A hearing on the proposed regulations is scheduled for March 2019.

Planning Opportunity:  Consider making lifetime gifts to lock in use of the current exemption amount.  Gifts may be made outright, to an irrevocable trust, or may take other forms, such as the forgiveness of intra-family loans.  Note that gifts of cash or high-basis assets are optimal, because the recipient of a lifetime-gift takes the donor’s cost basis for capital gain purposes, while the recipient of a gift from a decedent’s estate receives a new cost basis equal to fair market value as of the donor’s date of death.


GST tax exemption increasing to $11,400,000:  As of January 1, 2019, an individual may transfer up to $11,400,000 (increased from $11,180,000 in 2018) during life or at death without triggering the generation-skipping transfer (GST) tax.  Married couples may give up to $22,800,000 (increased from $22,360,000 in 2018).  The GST tax is an additional, flat tax assessed at the highest applicable federal estate tax rate (currently 40%) on transfers to persons two or more generations below the donor (i.e., to grandchildren or more remote descendants).  As with the unified gift and estate tax exclusion, the GST tax exemption amount is set to be reduced back to approximately $5,000,000 (adjusted for inflation) in 2026. 

Planning Consideration:  Clients whose existing estate plans tie distributions upon death to the amount of estate tax or GST tax exemption available at the time of the donor’s death may now wish to review such plans to avoid unintended results.  For example, a plan that provides that all GST-exempt property be distributed outright or in trust for grandchildren may result in a larger-than-intended distribution to the donor’s grandchildren (especially prior to 2026), and a smaller-than-intended distribution to the donor’s children.


Gift tax annual exclusion remains at $15,000:  In 2019 an individual donor may make annual gifts of up to $15,000 per recipient without incurring gift or GST tax, and without using any of the donor’s federal unified gift and estate tax exclusion or GST tax exemption.  Married couples may make annual exclusion gifts in 2019 of up to $30,000 per recipient, treating gifts made to third parties as if one half had been made by each spouse.


Annual exclusion for gifts to noncitizen spouse increasing to $155,000:  The annual exclusion for gifts made in 2019 to a spouse who is not a United States Citizen will be $155,000 (increased from $152,000 in 2018).


Federal Income Taxes

Increase in Standard Deduction:  The 2017 tax reform legislation increased the standard deduction to $12,000 for individuals, and $24,000 for married couples filing jointly.  Deductions for state and local taxes (SALT) are capped at $10,000.  As a result of the SALT cap, many taxpayers who previously itemized deductions will now take the standard deduction unless itemized deductions f(e.g., for charitable contributions and home mortgage interest) exceed $14,000.  The home mortgage interest deduction was largely preserved under the new tax law.  For pre-existing qualified residence loans, taxpayers may deduct interest on up to $1,000,000 of principal.  For new loans (beginning in 2018), taxpayers may only deduct interest on up to $750,000 of principal.  Under the new tax law, home equity loans and lines of credit are no longer tax-deductible.  The interest on HELOC loans used to buy, build or substantially improve the home that secures the loan is still tax-deductible (as long as it falls within the home loan debt limit).


Increased Deduction Limit for Cash Charitable Contributions:  The new tax law allows taxpayers to deduct the full amount of cash contributions to charity as long as the deduction for charitable contributions does not exceed 60% of adjusted gross income (AGI).  Previously, the deduction for cash charitable contributions was limited to 50% of AGI.  Rules limiting deductions for charitable contributions of appreciated securities to 30% of AGI remain in place.  Any charitable contributions exceeding the AGI limits may be carried forward and applied for up to five subsequent years, subject to the same percentage limitations.


IRA Charitable Rollover:  Taxpayers who are 70½ or older and who expect that the charitable deduction will be unavailable to them for the 2018 tax year, either because of the increased standard deduction or because of the AGI deduction limits, may wish to consider making a “qualified charitable distribution” (also known as an IRA Charitable Rollover).  The IRA Charitable Rollover permits taxpayers who are 70½ or older to transfer up to $100,000 annually from their IRAs directly to public charities without recognizing the distributed amount as taxable income (thereby obviating the need for a deduction).  Furthermore, any such charitable distribution will also count against the Required Minimum Distribution for the year.

State Transfer Taxes

 

2018

2019

Connecticut (estate and gift tax exemption)

$2,600,000

$3,600,000

Maine (exemption)

$5,600,000

$5,700,000*

Massachusetts (exclusion)

$1,000,000

$1,000,000

New York (exclusion)

$5,250,000

$5,740,000


Connecticut increases gift and estate tax exemptions to $3,600,000:  The Connecticut Legislature recently passed a bill that will increase the Connecticut estate tax exemption gradually from $3,600,000 to the federal exemption level.  The Connecticut exemption will rise to $5,100,000 in 2020, $7,100,000 in 2021, $9,100,000 in 2022, and the federal exemption amount in 2023.  By conforming Connecticut’s exemption to the federal exemption amount, the Connecticut Legislature created the possibility that the Connecticut exemption may decrease if the federal exemption decreases, which it is scheduled to do under current law on January 1, 2026. 

In 2019, the Connecticut estate tax will range from 7.8% to 12%, with no tax whatsoever on the first $3,600,000.  The top rate applies for estates in excess of $10,100,000. 

Connecticut is the only state in the nation that assesses a state gift tax.  The Connecticut gift tax exemptions match the Connecticut estate tax exemptions.  For 2019, Connecticut gift tax rates will range from 7.8% to 12%, and the maximum rate will apply to aggregate lifetime gifts in excess of $10,100,000.  Connecticut does provide a gift tax annual exclusion similar to the federal annual exclusion -- in 2019 an individual donor may make annual gifts of up to $15,000 per recipient without incurring Connecticut gift tax.  Married couples may make annual gifts of up to $30,000 per recipient without incurring such tax.


Maine adjusts estate tax exemption upwards for inflation to approximately $5,700,000*, but decouples from the Federal estate tax exemption:  The Maine estate tax exemption in 2019 will be approximately $5,700,000*, up from $5,600,000 for 2018.  The Maine Legislature “de-coupled” Maine’s estate tax exemption from the federal estate tax exemption in September 2018, effective retroactively for decedents who died on or after January 1, 2018. 

Maine’s estate tax rates range from 8% to 12%, with no tax on the first $5,700,000*, for 2019.  The top rate applies for estates in excess of $11,490,000.

*Predicted figure.  For the purposes of the Maine estate tax exemption, the inflation adjustment is the Chained Consumer Price Index (C-CPI)for the 12-month period ending June 30th of the preceding calendar year divided by C-CPI for the 12-month period ending June 30, 2017.


Massachusetts estate tax exclusion remains at $1,000,000:  The Massachusetts estate tax system is unusually complex, with an exclusion—not an exemption—of $1,000,000.  On estates valued less than $1,000,000 after deductions, no tax is owed, but for all others, tax must be remitted on the full amount, not just the amount over $1,000,000, creating a “tax cliff.”

Massachusetts’s estate tax marginal rates range from 5.6% to 16%.  The top rate applies to estates in excess of $10,040,000. 


New York estate tax exclusion increases to $5,740,000:  The New York estate tax exclusion will increase to $5,740,000 for 2019, up from $5,525,000 for 2018.  For estates valued less than $5,740,000, no tax is owed.  For estates valued between $5,740,000 and $6,027,000, New York estate tax is owed on the amount in excess of $5,740,000.  Estates exceeding more than 5% of the exclusion amount (i.e., for 2019, estates exceeding $6,027,000) are taxed on the full value of the estate, creating a “tax cliff.”

An additional change to the New York estate tax relates to the inclusion of lifetime gifts in the calculation of the gross estate.  For deaths after January 1, 2019, estates will no longer be required to include the amount of lifetime gifts, regardless of when they were made, in the calculation of the gross estate.  Previously, gifts made within three years of death were re-included for purposes of calculating the New York gross estate.

New York’s estate tax rates range from 3.06% to 16%.  The top rate applies to estates in excess of $10,100,000. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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