Estate and Gift Taxes Under the New 2018 Tax Law
In December, I published this blog post outlining specific steps that could be taken before the end of 2017 in light of proposed tax changes. Since then, the proposed tax code has become law and there are further updates for the 2018 tax law.
The 2017 Tax Cuts and Jobs Act, which became law January 1st, makes changes to the federal estate tax as follows.
Who Is Exempt Under the 2018 Tax Law?
Individuals dying in the years 2018 through 2025 can pass $11.2 million dollars to their heirs without estate tax. This number will continue to be adjusted for inflation. A married couple aggregating their exemptions can pass twice that or $22.4 million dollars without federal estate taxFederal Estate Tax: The federal estate is part of a unified federal gift and estate tax that is an excise on the transfer of wealth. Read More. Those above those thresholds will see a 40% tax (no change in the rate).
The most common reason given for the “sunset” of the tax law in 2025 is that it is not revenue-positive or even revenue-neutral, and unless the law is extended in future years (with all the tax revenue that very few predict), the law will revert to 2017 provisions.
For us, this means that something like two out of 100 of our law firm clients and as few as one in 1000 dying US residents will have to pay estate taxes. This is about 1/20 of the number of households who paid estate taxes in 2001.
The Federal Gift Tax Law Has Also Changed
Federal gift tax law has also changed so that the exemption matches the estate tax. Meaning, you (yes, you America) can sleep easier in the knowledge that you are free to give away $11.2m ($22.4m if married) before having to pay gift taxes. Imagine how generous you can be! Go for it! I have no statistics on the remote possibility that anyone will be paying gift taxes. I will definitely not be paying gift taxes.
Specifics for Massachusetts
A few states’ estate taxes will go down because they are tied to the federal system’s 2018 tax law. Not Massachusetts. We still have a “stingy” $1 million exemption. No aggregating your spouse’s $1m with yours either. And, while Massachusetts does not have a gift tax, the state loves to claw back gifts into the estate tax calculation. Furthermore, as the federal government has less money to hand out to states in the near future, what does this tell me about state taxes? I’m not sure (and I’ve seen multiple predictions), but I don’t think they’re going down.
All in all, the new tax law will affect just a few of our clients every year, directly. Mostly, what it does is create a sense of wonder over what will happen when Congress and the executive branch swing left again (as seems inevitable) and how to plan for continued uncertainty for the effect of estate tax. It makes me want to keep my life insurance policies, just in case, and study up on the effects of income tax on estates, trusts, and heirs, which is a bigger threat to more estates than estate tax.
For more information or a review of your tax status, give us a call.
