Individuals who previously exhausted their $5.49 million gift tax exemption now have another bite at the apple.
Under the Tax Cuts and Jobs Act, individuals are now able to transfer approximately $11.18 million free of estate, gift and generation-skipping transfer tax during their lives or upon death. A married couple will be able to transfer approximately $22.36 million during their lives or upon death. And due to the portability of the deceased spouse’s unused exclusion amount, any unused federal estate tax (but not GST tax) exemption for the first spouse to die may be used by the surviving spouse for lifetime gifting or upon death.
The annual exclusion gifting amount was $14,000 (or $28,000 if spouses elect to split gifts) for gifts made in 2017. This amount is subject to indexing in future years and is expected to increase to $15,000 (or $30,000 if spouses elect to split gifts) for gifts made in 2018. (The amount of the gift tax annual exclusion awaits confirmation from the Internal Revenue Service.)
The increase of the exemptions gives individuals vast opportunities to leverage their gifting for multiple generations through the following techniques:
- Topping off prior planning by making gifts to existing and/or new family trusts including GST trusts, insurance trusts, spousal lifetime access trusts and grantor retained annuity trusts
- Making new sales to intentionally defective grantor trusts or, when appropriate, making cash gifts to facilitate the prepayment of existing installment obligations to senior family members
- Making new intra-family loans (or, when appropriate, cash gifts to facilitate the prepayment of existing loans from senior family members)
State Specific Considerations
State estate-tax-specific considerations may apply in the wake of the temporarily expanded federal exemptions. For example, residents of New York, which imposes a state estate tax as high as 16 percent, have greater opportunities to plan ahead to reduce their New York taxable estates using the expanded federal exemptions. New York has a unique feature of its estate tax law under which there’s a cliff built into its estate tax calculation, which quickly phases out the benefits of the New York basic exclusion amount (currently $5.25 million) if the decedent’s New York taxable estate (plus certain taxable gifts made within three years of death) is between 100 percent and 105 percent of the exclusion amount available on the date of death. In addition, at certain taxable estate levels, it can produce a confiscatory marginal New York estate tax rate that’s substantially in excess of 100 percent. As a result, the New York estate tax exclusion only fully benefits individuals whose New York taxable estates (including taxable gifts made within three years of death) fall below the New York exclusion amount in effect on the date of death. In addition, the New York estate tax exemption isn’t portable to spouses for lifetime gifting or for use on the survivor’s New York estate tax return, in sharp contrast to the federal estate tax exemption.
As a result of the dramatic spread between the federal and New York estate tax exemptions ($11.18 million federal versus $5.25 million for New Yorkers dying in 2018), decedents whose estates are below the federal estate tax exemption amount may still owe significant New York estate tax if their estates exceed the New York estate tax exemption amount. In addition to confirming that will provisions can fully soak up the New York estate tax exemption of the first spouse to die (including via an executor’s decision not to make a qualified terminable interest property election for property in trust), New Yorkers may consider gifting such amount as would bring their taxable estate below the New York estate tax exemption amount. If a person dies more than three years after making the gift or after the three-year addback rule has expired (it’s currently scheduled to expire for persons who die on or after Jan. 1, 2019), the New York estate tax can be completely eliminated on the first spouse’s death. Depending on the circumstances, the total combined New York estate tax savings for a married couple can potentially exceed $1 million.