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Estate Planning After Tax Reform

POSTED 09/18/2018

 | By: Casey Haggerty, CPA, Tax Manager

As many are aware by now, the Tax Cuts and Jobs Act (TCJA) that was passed into law this past December has had a significant impact on many different areas of tax law. Estate and transfer taxes are no exception.

The major change that occurred in this area relates to the estate and gift tax lifetime exclusion amount. This is the amount that someone can either:

  • Gift during their lifetime, or
  • Have included in their estate when they pass away, and not be subject to any estate or gift taxes

New Exemption
As shown in the table below, the TCJA essentially doubled the amount of the exemption.

  2017 2018
Individual $5.49 M $11.18 M
Married Couple $10.98 M $22.36 M


As the law is currently written, these exclusion amounts will be indexed for inflation each year until they revert to the old exclusion amounts on 1/1/2026. This results in an eight-year window of flexibility for individuals to do some additional estate planning with the higher exclusion amounts.

Planning Considerations
It is instinctive to assume that the best move is to make additional gifts now so that when the exclusion amounts revert to the old limits, the higher exclusions will have already been utilized. There is a general expectation that in the event a taxpayer utilizes the higher exclusion amounts when the amounts revert, there will not be any type of claw-back requiring gift tax to be paid in a later year.

While gifting assets held by an individual that are likely to appreciate in value is typically a very effective estate planning technique, it is important to note that gifted assets lose the benefit of a step-up in basis at death. As such, careful consideration should be given to the implications of estate tax savings vs. income tax savings, including discussion surrounding the type of income tax that may apply at the Federal and state levels as well as whether the individual resides in a state that has an estate tax of its own.

For example, if a taxpayer has low basis assets and is going to be subject to the estate tax when he dies, gifting those assets now will result in the recipient paying tax on the gain, when the asset is sold, at a rate of between 10% and 37% for federal purposes. The income tax rate will depend on if the income is capital or ordinary, passive or active, and the overall rate that applies based on other income factors for the recipient. Alternatively, if the same asset is held until death the recipient will benefit from a step-up in basis and will have no income tax to pay. However, gifting now, will allow any appreciation to escape the estate tax. Essentially, you have to “run the numbers” to know for sure what the best option is.

The expectation is that the number of taxable estates will greatly decrease from approximately 5,000 in 2017 to somewhere between 1,800 and 2,000 for 2018. As was the case the last time the lifetime exclusion increased significantly, most estate planners will be shifting their focus from reducing estate tax to more critical income tax planning. For example, gifting high income producing assets to a trust that makes distributions to a beneficiary that is in a lower tax bracket.

To learn more, contact Clayton & McKervey at claytonmckervey.com.