The Tax Laws Have Changed, and This Time It’s a Matter of Life and Death
Over the past two weeks, my colleague, Kyle Day, has waxed poetic about how his tax expertise has made him the beau of the ball in social gatherings. However, despite Kyle’s giddiness over the most recent individual and corporate tax changes, even he has to admit tax-cut legislation is nothing new, and therefore, the real reason the Tax Cuts and Jobs Act is the most significant tax-related legislation since 1986, is due to the changes affecting estate planning and gifting. (Disclaimer: Yes, I am aware the corporate tax cuts are permanent, and therefore, inarguably, the most significant change, but bear with me here.)
Estate, Gift, and Generation-Skipping Tax (GST) Exemptions. The Tax Cuts and Jobs Act has doubled the lifetime estate and gift tax exemption from $5.6 million to $11.2 million for individuals and from $11.2 million to $22.4 million for married couples. In other words, an individual can give away during life or transfer upon death up to $11.2 million without incurring estate or gift taxes, while a married couple that transfers all of the first-to-die spouse’s wealth to the surviving spouse are exempt from estate taxes up to $22.4 million. In addition, the Tax Cuts and Jobs Act retained tax provisions allowing a “step-up-in-basis” of transferred property, allowing the beneficiary to value the property for tax purposes at the fair market value at time of inheritance, minimizing the beneficiary’s capital gains tax exposure.
Annual Gift Tax Exclusion. If the raise in estate and gift tax exemption wasn’t enough to get you excited, the amount of assets that an individual can give to another individual in any given year without using one’s exemption, has risen from $14,000 to $15,000 ($30,000 for married couples). While the annual exclusion is not indexed to inflation like the exemption, it will likely be raised periodically by Congress in the future.
Charitable Deduction. There is widespread concern in the non-profit and charitable giving community that the nearly doubling of the standard deduction and lowering of the top effective tax rate will have a large, negative impact on charitable giving. In a likely effort to mitigate expected declines in charitable giving, the law includes a little-known provision that raises the amount one can claim as a charitable deduction from 50% to 60% of adjusted gross income. Of course, whether this will be enough to stem the tide of an expected decline in charitable giving is not yet known.
Section 529 Plans and ABLE Accounts. Prior to the Tax Cuts and Jobs Act, Section 529 Plans’ growth and withdrawals were tax free only when used for eligible college expenses. Starting January 1, 2018, for the purposes of federal tax reporting, withdrawals from 529 Plans are also tax exempt when used for eligible expenses related to public, private, and religious elementary and secondary schools. Note, however, that until and unless your state adopts the expanded definition of “qualified education expenses,” you may incur state income tax assessments for such contributions.
The Tax Cuts and Jobs Act also includes changes to contribution and roll-over principles related to ABLE accounts, which are investment accounts that allow individuals with a disability that began prior to the age of 26 to save money for qualified disability expenses, which include everyday living and quality-of-life expenses that Medicaid and Supplemental Security Income do not cover. Section 529 and ABLE accounts are closely related and are generally governed by the same contribution and withdrawal principles (excepting the separate definitions of “qualifying expenses” under each). Importantly, in the event the type of qualifying expenses change from education-related to disability-related for a beneficiary of an account, the Tax Cuts and Jobs Act now allows a tax-free rollover of up to $15,000 each year from a 529 Plan to an ABLE account. In addition, the disabled beneficiary of an account is able to make tax-exempt contributions of a limited amount of his or her own employment income in addition to the $15,000 limitation for contributions by family members.
Sunset Provisions. Of course, unless your legal name is “Apple, Inc.,” “Amazon.com,” or “Home Depot,” (remember, corporations are people, too) the age-old saying “all good things must come to an end” applies to you in regard to many of the Tax Cuts and Jobs Act tax benefits, including the individual income tax and transfer tax reforms (e.g., estate, gift, and GST exemption increases) discussed above. While it is possible the law could be amended, revoked, extended, or made permanent, the current language sunsets the individual and transfer tax reforms after 2025.
What Should I Do? I am glad you asked! First and foremost, everyone, regardless of whether the planning considerations discussed above affect you or not, should have an estate plan to ensure the organized, efficient, and custom distribution of your assets following your death. However, for those who created trusts prior to the recent tax cut passage—which were designed to forego the beneficiary receiving a stepped-up-basis in the transferred property in favor of minimizing an estate’s tax exposure based on the old $5.6 million and $11.2 million exemptions—should seriously consider discussing a new distribution structure that accounts for the raise in the exemptions and allowing him, her, or them, to take advantage of both the exemption and step-up-in-basis (knowing all the while, of course, that the law may revert back in 2025).
This article is designed and intended for general information purposes and should not be construed or relied upon as legal advice. Your individual situation will determine what is right for you and you should consult an attorney if specific legal information or advice is desired.