Transferring Wealth In Light Of Tax Reform

The new tax reform that was signed into law in December, 2017, made important changes that will affect estate planning and wealth transfer strategies for many individuals and families. Here are some of these changes and how they might impact you and your family.

Estate and Gift Tax Exclusion Doubled

The main provision of the tax reform that affects wealth transfer strategies is the doubling of the estate and gift tax exclusion from $5 million to $10 million, indexed for inflation. This applies to the estates of those who die, generation-skipping transfers, and gifts made between the start of 2018 and the end of 2025.

In 2018, due to the inflation indexing, the exclusion amount will be $11.18 million per person, or $22. million for a married couple. While the estate tax wasn’t repealed outright, only the wealthiest individuals and families will be subject to the estate tax between now and 2026. According to one estimate, just 1,800 estates will have to pay the estate tax this year, which is down from about 5,000 estates last year.

Also note that in addition to the doubling of the estate and gift tax exclusion, the annual exclusion amount for gifts has been increased from $14,000 to $15,000 per donor. This change is due to inflation adjustments, not the tax reform act.

Strategies for the Rest of Us

If you’re not one of these 1,800 wealthy families, then what should you be doing now from an estate planning and wealth transfer perspective? Here are a few suggestions based on the size of your estate:

If you and your spouse’s combined assets are less than $5 million, you may want to address whether your assets will be left outright to the surviving spouse or left in a trust. Also, when the second spouse passes, will the assets of your estate receive a second step-up in basis when the combined estate transfers to the next generation?

If you and your spouse’s combined assets are valued at between $5 million and $11 million dollars, you could use outright gifts to a surviving spouse with disclaimer planning to make use of the first spouse’s increased annual exclusion amount (as noted above). This will give you flexibility in case the doubled gift and estate tax exclusion sunsets back to $5 million (indexed for inflation) after 2025.

If you and your spouse’s combined assets are valued at between $11 million and $22 million, think about following the suggestions in the previous paragraph. Also, consider making use of the doubled gift tax exclusion that’s available through 2025.