If you are like most people, estate planning often feels like trying to complete a giant puzzle, except the pieces keep changing. The most recent of those puzzle pieces to change is how the lifetime exemption is used when calculating your estate’s federal gift and estate tax obligation. The good news is that the recent changes could help you transfer considerably more of your wealth tax-free over the next several years. To encourage you to sit down with your estate planning attorney and review your estate plan to see how your plan might benefit, the estate planning attorneys at Kulas Law Group explain the 2018 changes to federal gift and estate taxes.
The Federal Gift and Estate Tax
The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from your estate during the probate of your estate. Every taxpayer is subject to federal gift and estate taxes. The tax applies to all qualifying gifts (almost all gifts are considered “qualifying” gifts) made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. To illustrate how the tax works, imagine you made gifts during your lifetime totaling $5 million in value. Your estate, at the time of your death, was valued at an additional $10 million. The combined total of $15 million would be subject to federal gift and estate taxes. Historically, the federal gift and estate tax rate was subject to change – and did change on a regular basis. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. Without any deductions or adjustments, that $15 million estate would owe $6 million in federal gift and estate taxes.
2018 Changes to the Lifetime Exemption
The good news is that each taxpayer is entitled to factor in the lifetime exemption prior to calculating the amount of gift and estate taxes owed to Uncle Sam. ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. For 2018, the lifetime exemption amount would be $5.49 million for an individual and $10,980,000 for a married couple; however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years to come. Under the new law, the exemption amounts increased to $11,200,000 for individuals and $22,400,000 for married couples. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. Consequently, that same $15 million estate would now only pay gift and estate taxes on $3.8 million, reducing the amount of federal gift and estate taxes to $1,520,000.
Should You Update Your Estate Plan?
If you currently have an estate that would be subject to federal gift and estate taxes under the previous lifetime exemption law, the temporary increase in the lifetime exemption amount may present an opportunity to transfer more of your wealth without incurring taxes over the next few years. Because estate planning is very personal, and because the gift and estate laws are subject to change, it is imperative that you consult with your estate planning attorney to decide how best to make use of the increase in the lifetime exemption.
Incorporating Tax Avoidance into Your Overall Estate Plan
Along with taking advantage of the recent change to the lifetime exemption, you may wish to also incorporate additional tax avoidance tools and strategies into your estate plan. For example, you might make use of the annual exclusion. The exclusion allows each taxpayer to make annual gifts valued at up to $15,000 (for 2018) to an unlimited number of beneficiaries without those gifts counting toward your lifetime exemption. Married couples can combine their exclusion and make gifts valued at up to $30,000. Imagine that you and your spouse made yearly gifts to four beneficiaries. You could transfer $120,000 each year tax-free. Now assume you made those gifts each year for just ten years. You will have transferred $1.2 million without using any of your lifetime exemption limit. The $1,520,000 tax obligation from the above example would be reduced to just $320,000!
Contact Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how the recent changes to the federal gift and estate tax might impact your estate plan, contact the experienced Florida estate planning attorneys at Kulas Law Group by calling (772) 398-0720 to schedule an appointment.