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Estate Planning Alert: New Tax Law Doubles the Federal Estate Tax Exemption Amount … For Now

Posted on January 29, 2018 by Carol Hill

The Tax Cuts and Jobs Act, signed into law by President Trump on December 22, 2017, is the most significant U.S. tax reform to be enacted in over thirty years. One of its many components is the near doubling of the federal estate, gift, and generation-skipping transfer-tax exemption amount applicable to individuals. The Act raised the exemption from $5.45 million per person to $11.18 million per person (or $22.36 million per married couple) – at least until January 1, 2026, when the exemption is set to “sunset” back to only $5 million per person.

With the larger federal exemption amount, only a small fraction of a percent of U.S. estates will be subject to federal estate tax. (Only 0.2 percent of U.S. estates were subject to federal estate tax under the prior law.) And although the increase in the federal exemption would, on its surface, seem to make estate tax planning even less relevant to most of us, it is important to keep in mind that the exemption amount has increased drastically since 2000, when it was a mere $675,000. Generally, any estate plans that have trusts and formulas based on the outdated law and old exemption amounts should be reviewed to determine whether the plan is still sound, or needs to be updated – especially given the substantial increase in the exemption to $11.18 million under the new law.

For example, if a person with a $2 million estate signed a Will in 2003 when the federal estate tax exemption was only $1 million, there may be an old formula in that Will giving “the maximum amount that can pass free of federal estate tax” to a trust for children of a prior marriage, and the remainder to a new spouse. If the testator died in 2003, that Will would have resulted in a 50/50 split between the trust and the spouse. However, this formula would have a drastically different result today under the new law. Under today’s law, the entire $2 million would now pay to the trust (because up to $11.18 million can pass federal estate tax free due to the new exemption amount), and nothing would go to the spouse. This Will should be re-examined, and possibly re-drafted, to ensure that it reflects the person’s current intent and objectives.

An additional concern for planning purposes is the new law’s sunset reversion to a $5 million exemption in 2026. This reversion will occur unless Congress takes further action. It is currently unclear whether the IRS may attempt to “claw back” gift amounts made in excess of the $5 million exemption during the period of the time while that the exemption amounts are high (January 1, 2018 – December 31, 2025). Gifts in excess of the exemption should be made with caution until further IRS guidance is provided.

Additionally, in states such as Washington where the estate tax remains relatively unchanged with a much lower threshold for applicability, it is still very important to properly plan your overall estate tax plan. The Washington exemption is $2.193 million per person in 2018, so it affects many more estates.

If you would like to know how the new tax law might affect your estate plan, please contact one of the attorneys in the estate planning group at Lasher Holzapfel Sperry & Ebberson PLLC. We will be happy to assist you.