Final Tax Bill Doubles Federal Exemption; Increase Warrants Review of Estate Planning Documents

Congress passed the Tax Cuts and Jobs Act (“Tax Bill”) on December 20, 2017. It is expected that the President will sign the Tax Bill this year. The Tax Bill provides a significant increase in the federal exemption for gift and estate tax purposes. The federal exemption is the largest amount that you may transfer during lifetime and at death without the imposition of a federal gift or estate tax (“Federal Exemption”). The Federal Exemption is currently $5.49 million per individual and was scheduled to increase to $5.6 million on January 1, 2018; instead, the Tax Bill doubles the Federal Exemption to $11.2 million per individual on January 1, 2018. The Federal Exemption will be indexed for inflation each year until December 31, 2025. On January 1, 2026, the Federal Exemption will return to $5.6 million as increased for inflation, which is estimated to be approximately $6.2 million.

What does the doubling of the Federal Exemption mean for your estate plan?

Federal Exemption

Wills and Revocable Trusts for married individuals often contain provisions that provide for a bequest equal to the Federal Exemption to children, trusts for their benefit or a trust for a spouse. Typically, all remaining assets are distributed outright to a surviving spouse or to a trust for his or her benefit. This structure maximizes the use of the Federal Exemption for estate planning purposes; however, the doubling of the Federal Exemption will cause a larger portion of your assets than may have been intended to pass to beneficiaries other than the surviving spouse.

For example, if you make a bequest to your children or a trust for their benefit (rather than to a trust for your spouse) equal to “the amount of assets that can pass free of federal estate tax,” then that bequest will increase to $11.2 million on January 1, 2018. This provision may now result in a much larger bequest than you intended to your children or their trust, leaving less assets, if any, available to pass to your spouse.

New Jersey Residents

There are state estate tax considerations to be reviewed as well. New Jersey is scheduled to repeal its estate tax effective January 1, 2018. Under current law, the exemption from New Jersey estate tax is $2 million (“New Jersey Exemption”). The repeal of the New Jersey estate tax may also have an impact on your current estate planning documents. Current plans may limit the bequest to children or a trust for children or a spouse to the New Jersey Exemption or the lesser of the New Jersey Exemption and Federal Exemption. Effective January 1, 2018, that bequest may equal $11.2 million.

New York Residents

Residents of New York will also be impacted from an estate tax perspective. Under New York law, the exemption from the New York estate tax is currently $5.25 million (“New York Exemption”). The New York Exemption is scheduled to match the Federal Exemption beginning on January 1, 2019. If a current plan leaves a bequest to children or a trust for children or a spouse equal to the Federal Exemption and an individual dies in 2018, there will be a New York estate tax due of approximately $1.26 million which could have been avoided. The New York estate tax will be generated because of the difference in the Federal Exemption of $11.2 million and the New York Exemption of $5.25 million.

Therefore, it is essential to review your Will and Revocable Trust to determine how your estate plan is affected by the increase in the Federal Exemption. The best course of action might be to revise your estate planning documents if any bequests or distributions are a function of the Federal Exemption. If you are uncertain as to how the increase in the Federal Exemption impacts your estate plan, we can assist you.

Gifting Opportunities

In addition, the doubled Federal Exemption provides greater opportunities to make gifts during this period, particularly for individuals who may have already used their Federal Exemption. Different factors, such as the income tax basis of the assets, must be considered when deciding whether to make lifetime gifts.

Finally, in 2018 the annual exclusion for gifts will increase to $15,000 per donee from $14,000. The annual exclusion gifts are separate from the Federal Exemption and do not count against a person’s Federal Exemption.

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