By Estate Planning Practice Group
Amid much speculation and media attention, Republicans in Congress passed the Tax Cuts and Jobs Act (“Act”) in just under two months, and the President signed it into law on December 22, 2017. The Act created sweeping tax reforms. The Congressional Budget Office reported that the Act would give individuals and pass-through entities (such as partnerships and S-corps) approximately $1.125 trillion in net benefits over 10 years, while corporations would receive approximately $320 billion in benefits. While the corporate tax cuts were made permanent, the individual and pass-through tax cuts fade over time and eventually sunset, and will become net tax increases beginning in 2027. Some of the major elements of the Act include reducing tax rates for businesses and individuals, simplifying personal taxes by increasing the standard deduction and family credits (while eliminating personal exemptions and making it less beneficial for people to itemize their deductions), and repealing the individual mandate of the Affordable Care Act. The Act also changed the federal estate tax. Many were left wondering: How does this affect my estate planning and gifting? Some estate planning changes, both from the Act and from the transition to a new tax year, include the following:
- The exemption for gift, estate, and Generation-Skipping taxes doubled, from $5 million to $10 million per person, adjusted for inflation from 2011. Previously, the exemption would have been $5.6 million per person for 2018. It is now $11.18 million. This increase means that a couple can potentially pass $22.36 million free of federal estate tax upon their deaths. However, this increase sunsets on December 31, 2025, and it is currently unclear (albeit doubtful) whether there is a risk that gifts made during the effective period will be “clawed back” under a potentially less-favorable exemption, whatever that maybe, after the sunset date.
- The annual exemption for gifts has increased from $14,000 to $15,000 per donee for 2018. • Most property passing at death (except IRD assets such as traditional IRA accounts or retirement plans) will continue to receive a full adjusted basis to the date-of-death value, so long as the property is included in the decedent’s taxable estate.
- The gift, estate, and Generation-Skipping tax rate will remain at 40% on assets in excess of the exemptions. These changes present some planning opportunities for clients with high net-worth. Although we don’t have “official” guidance from the IRS on whether there will be a retroactive “clawback” of gifts, the Act mandates that the IRS must provide guidance on whether there will be clawback, which is doubtful. We hope to have an official answer sometime this year. If there will not be a retroactive clawback, it may be an appropriate strategy to engage in gifting during life under this higher federal estate tax exemption, so as to use it fully before the higher exemption sunsets. This is a particularly effective strategy in Oregon, because while Oregon continues to have a $1 million estate tax exemption, Oregon does not have a gift tax. In other words, while gifts over the federal annual exclusion reduce your federal estate tax exemption at death, such gifts do not reduce Oregon’s estate exemption. Despite the increase to the federal estate tax exemption, however, Oregon’s low estate tax exemption is not adjusted for inflation and continues to be a challenge for many households, particularly because life insurance is included in a person’s taxable estate at death. Gifting can be an effective strategy to remove assets from your estate while you are alive, but it is still important to have an estate plan that implements all of the best strategies to maximize your Oregon estate tax exemption. Oregon’s estate tax rate continues as a marginal rate of 10–16% on the excess passed over $1 million. For Washington clients, the estate tax exemption is adjusted for inflation annually and is currently $2,193,000 for 2018. Although Washington provides a larger cushion, many of the planning strategies that are effective and important for Oregon clients are equally important for Washington clients.
While the Act can provide some great new planning opportunities, particularly during life, it is still important to utilize estate tax strategies under Oregon and Washington’s regulatory framework. The attorneys in Saalfeld Griggs’s Estate Planning practice group are happy to answer any questions you may have about how the Act has affected your estate plan.