Proposed Federal Estate & Gift Tax Reform – What You Need To Know Now
The U.S. House of Representatives and the U.S. Senate have now passed separate versions of the "Tax Cuts and Jobs Act." The proposals that are being discussed in the news as "repeal of the death tax" are much more complex than the TV sound bites reflect and there are still unresolved differences between the House and Senate versions. Here are the changes that our clients may want to consider as the tax reform debate unfolds:
The House Bill (H.R.1) calls for increasing the federal estate, generation skipping transfer and gift tax unified credit basic exclusion amount from the current $5M to $10M for decedents dying and gifts made after 2017. This includes the annual adjustment for inflation (which results in the credit of $5.49M in 2017). It also calls for repeal of the federal estate and generation skipping transfer tax for decedents dying after 2024 (while retaining the provision allowing a "stepped-up" income tax basis at death). The bill would lower the federal gift tax rate from 40% to 35% for gifts made after 2024.
The Senate plan calls for the same increase in the federal estate, generation skipping transfer and gift tax unified credit basic exclusion to $10M for decedents dying and gifts made after 2017. The Senate plan does not provide for a repeal of the estate tax at any point in the future. Instead, it provides that the increase in the unified credit basic exclusion amount would expire for decedents dying and gifts made after 2025, and would revert back to the amount provided before Jan. 1, 2018 (that is $5M).
If this makes your head spin, you are not alone. Under the House proposal, if you die between 2018 and 2024 with a federal taxable estate of $10M or more, your estate will have a federal estate tax obligation, but if you survive beyond 2024, you will owe no federal estate tax and the gift tax for lifetime gifts will be subject to a lower rate. The Senate proposal also increases the federal estate tax exclusion to $10M with no plan to repeal the tax, but if you survive beyond 2024, your estate is subject to the current $5M exclusion. So presumably, the fans of the House proposal are young enough to foresee a day after 2024 when no federal estate tax will apply, but the fans of the Senate proposal are an older bunch hoping for death before 2025. In the big scheme of Tax Reform, debate over the "death tax" is going to focus on the policies associated with the transfer of mega estates and it could be a tool to resolve differences somewhere else. The proposed new law now covers hundreds of personal, business, charitable and corporate income and other tax code sections. The comparison between the House and Senate proposals for each of these categories include many contradictions similar to the ones described for the estate and gift tax. In August, President Trump said of health care reform, "who knew it was so complex?" Many health care professionals spoke up and said "we knew." The proposals under debate pose significant implementation problems. The BNA reports that accountants fear they will be overwhelmed if tax reform happens quickly. Lobbyists who lined up both in support and in hopes of defeat will now line up to provide input on resolving the differences between the proposed House and Senate bills. What Won't Change: It is too early to predict the immediate impact on wealth transfer taxation, but I am comfortable predicting that tax applications will continue to change throughout our lifetime. Over a ten-year period, some of the proposed changes begin years in the future, others expire. The new tax code may well be more complex than the one being reformed. If any of the estate and gift tax repeal provisions pass now, wise affluent and high net worth clients will not abandon all thought of federal estate and gift tax planning. In a rapidly changing financial and economic environment, no transfer tax law or reliable wealth management tool can be truly "permanent."
Oregon, Washington, and many states have their own estate tax. Oregon has a flat $1M exemption. For Washington, it is $2M adjusted annually for inflation ($2,129,000 for decedents dying in 2017 and $2,193,000 in 2018). State estate tax rates can be as high as 20% for the largest estates. It is unlikely that either Oregon or Washington will eliminate their state estate tax. Many states, Oregon and Washington included, do not have a gift tax at all. At these state rates, gift tax planning remains an important consideration.
There are many non-tax reasons to work with your estate planning team. You may have or need testamentary or other types of trusts to protect you and your family from creditors, predators, and the uncertainties of family relationships arising out of death and/or divorce. You may want to make a sizeable gift to a charity now or on your death. Many more of you are considering these and other non-tax reasons for creating trusts for you, your children, and your spouses.
What You Should Do Now: Especially in these uncertain times, your attorneys, CPA, financial advisor, and insurance professional working together can review strategic wealth transfer options. Projections completed by your wealth manager could be essential to confirming how much planning should be done and how. Your team will have vital input on wealth transfer options, federal and state income tax implications, and more. You should evaluate your gifting plans together with your accountant, your financial advisor, and your estate planning and business attorneys before drawing an informed conclusion.
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