The tax bill, known as the Tax Cuts and Jobs Act, passed by the House and Senate on December 20, 2017, is arguably the biggest tax overhaul since the Reagan administration. Along with the passage of the bill come some major changes to the estate and gift tax. As the bill becomes law, here’s what you need to know.
Significant increases to the estate and gift tax exemption. The federal estate tax is a tax that gets paid on property (cash, real estate, stocks, etc.) transferred from deceased persons to their beneficiaries. In calculating that estate tax, the federal government allows a certain value to be “exempt.” That federal exempt amount is uniform throughout every state. (Although some states have their own state estate tax). With the new tax overhaul, the exemptions went up from a $5 million base, set in 2011, to a new $10 million base, available for years 2018 through 2025. The exemption is indexed for inflation, so an individual can protect approximately $11.2 million in assets from these taxes. Another federal estate law provision called “portability” allows couples to double that exemption, meaning a couple could exclude $22.4 million in estate taxes.
Most Americans will not be affected by these changes but the richest Americans will have huge planning opportunities. A high net worth couple can gift or transfer at death up to $22.4 million without being taxed on those transfers. Some effective gifting strategies include: philanthropic gifts (i.e. Charitable Lead Trusts), making gifts to existing or new irrevocable trusts, and leveraging gifts to help fund life insurance or existing sales to trusts. Aside from these huge benefits to the ultra rich, the average Joe will still be able to take advantage of the step-up in basis rule.
Step-Up in Basis Rule Remains in Effect. The tax bill does not make any modifications to the rules that step-up basis at death. That means that when you pass away, your heirs’ cost basis in the inherited assets are assed at the date of death value; not the value at which the decedent originally purchased the asset. The step-up in basis rule adjusts tax liability for inherited assets compared to other assets. For example, Jane bought a house in 2001 for $200,000. When Joe inherited the house after Jane’s death, the house was worth $500,000. When Joe sold the house, his tax basis was $500,000. He paid taxes on the difference between the selling price and his stepped-up basis of $500,000. If Joe’s cost basis were $200,000, he would have paid much more in taxes when selling the house.
Regardless of whether you are a multi-millionaire or working-class American, there are countless ways to ensure your hard earned money is protected through proper estate planning. Contact an OC Estate & Elder Law attorney at (954) 251-0332 for guidance on how to maximize savings.