Though the tax reform bill passed in December, 2017 has been mostly heralded as a benefit for corporations, with a dramatic reduction in the corporate tax rate, it also made some significant changes in estate and gift tax law. Here’s an overview of those changes.
The Federal Estate and Gift Tax Exemption
Under the tax reform bill, the amount that you can claim as an exemption from estate and gift tax doubled, from just over $11 million to nearly $22.5 million. Accordingly, either during the course of your life or upon you death, if you’re married, you and your spouse can pass on over $22 million without incurring any federal estate or gift tax. It’s important to understand, however that the increase is only available for the next eight years, going away in 2025.
While the exemption amount was increased, the rates for estate, gift and generation-skipping taxes remained unchanged. However, because the increase in the exemptions will take more estates out of tax territory, those taxes will apply to significantly fewer estates.
It’s important to understand that the exemption amounts addressed here apply only to federal estate and gift tax obligations. There are still 15 states with some form of state inheritance or estate tax and New Jersey and New York are two of them. Accordingly, the federal tax law changes may not have a significant impact on your need for estate planning or the amount of your potential tax liability.
The Annual Gift Tax Exclusion
The tax law bumps up the annual gift tax exclusion to $15,000, up one thousand dollars from the previous ceiling. You can always make a larger gift, but doing so will reduce the amount of exemption available for your estate at the time of your death, dollar for dollar.
The Need for Non-Tax Estate Planning
Tax planning is not the only reason to engage in estate planning. A properly drafted Last Will and Testament may be necessary to distribute your estate in the manner that you desire. You may want to create a trust for the benefit of minor children to protect them financially. You may want to create a Special Needs Trust to benefit someone receiving governmental benefits without putting those benefits in jeopardy. And elderly individuals may want to set up a trust to protect their assets from people who may try to take advantage of them.
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