> The Tax Cuts and Jobs Act increases the estate and gift tax exemption to $11.2 million per person in 2018.
> Estate plans that are outdated or fail to consider the estate tax at the state level could result in a much greater tax liability than necessary.
> The uncertain future of the estate tax requires that those who have potential estate tax liability begin planning immediately.
Federal Estate Tax
The Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. The Act increases the estate and gift tax exemption from $5.49 million in 2017 to $11.2 million per person in 2018. Under prior law, the exemption would have increased to $5.6 million in 2018 as a result of inflation. The top estate tax rate remains at 40%. The increased exemption is temporary and far from a repeal, but offers significant tax planning opportunities for individuals, couples and families with taxable estates. The increased estate tax exemption under the Act is indexed for inflation until January 1, 2026, when it will return to 2017 levels.
State Estate Tax
While the federal estate tax exemption is increased until the end of 2025, the Illinois estate tax exemption remains at $4 million. Since the decoupling of the Illinois and federal exemptions in 2009, proper estate planning must take both exemptions into consideration so that the least possible tax will be due. However, the difference between the two exemptions has never been this large. Thus, estate plans that are either outdated or fail to consider the estate tax at the state level could mistakenly result in a much greater tax liability than necessary.
Since most states do not impose a gift tax of their own, we may likely see a flood of significant gifts from one generation to the next before January 1, 2026. However, for individuals and families interested in utilizing the exemption to the fullest extent, planning early will allow the future growth of assets to occur outside of the giftor’s taxable estate, thus providing greater leverage of the exemption. By making such gifts in an irrevocable trust rather than as an outright transfer, the giftor can also retain control (within IRS limitations) over the purpose of the gifts while reducing the size of his or her taxable estate.
The annual gift tax exclusion remains at the pre-Act levels. In 2018 the exclusion will rise to $15,000 and will continue to be indexed for inflation in future years, increasing only when such inflation causes the exclusion to exceed the $16,000 mark. This exemption can be used to make gifts, up to the exclusion amount, to as many people as the giftor wishes without affecting his or her lifetime exemption. Such gifts can also be made in a Gift Trust to protect the assets and restrict their use or an Irrevocable Life Insurance Trust (ILIT) to pay a life insurance premium in order to maximize the benefits of such gifts.
The increased federal estate and gift tax exemption offers significant planning opportunities for those with taxable estates. Without further Congressional action, the increased exemption will expire at the end of 2025. Of course, the exemption could also be decreased by future tax legislation.
The uncertain future of the exemption requires that those who have potential estate tax liability and have the ability and interest in transferring a large amount of assets to future generations should begin planning immediately. Those with estate planning already in place should confirm that their plans are flexible and can accommodate the current changes. Additional planning may also be advantageous in the current environment in order to maximize the available exemptions and low interest rates.
Due to such drastic fluctuations in the estate tax, future uncertainty and sunsetting tax provisions, flexibility is a key feature of an effective estate plan. On-going communication with your estate planning attorney can help ensure that your estate plan continues to serve the best interests of you and your loved ones while also administering your estate as efficiently as possible and minimizing your tax liability.