The major change to estate and gift taxes in the Tax Cuts and Jobs Act of 2017 is a doubling of the integrated estate and gift tax exemption to approximately $11.2 million1 for decedents dying and gifts made in 2018. A married couple has the benefit of two exemptions for a total of approximately $22.4 million in 2018. The new law also doubles the exemption from the generation-skipping tax (GST) in 2018 to approximately $11.2 million for an individual and approximately $22.4 million for a married couple. These exemptions will continue to be adjusted annually for inflation.
These changes sunset after the end of 2025 and (unless there is further legislation to extend them) in 2026 these exemptions will revert to an inflation adjusted amount that is currently estimated to be approximately $6.3 million per person (assuming an inflation rate of two percent between now and then).
Many people have Wills or Revocable Trusts that create a trust of the amount of property that would be exempt from estate tax at the creator’s death. Often this amount is expressed in a formula based on the tax law, rather than an exact amount (because the amount of this exemption changes and the exemption that is available is reduced by lifetime gifts). If your estate planning documents contain a clause or clauses with a formula related to the US estate and gift tax exemption (or the generation-skipping tax exemption), the doubling of this exemption by the 2017 Tax Act may result in unintended consequences. For example, an individual whose Will or Revocable Trust Agreement leaves the federal exemption amount to his/ her children, either outright or in Trust, with the balance payable to his/her spouse would have a very different result as to the disposition of assets based on the new tax law, than would have been the case last year. Another unwelcome surprise might occur for an individual whose Will or Revocable Trust Agreement created a sprinkle trust in the federal exemption amount for the benefit of surviving spouse and children with the residue passing to the surviving spouse. Depending upon the size of the Estate of the first spouse to die, under the new tax law there might not be any assets passing to the surviving spouse at all. Therefore, it is important that you consult with your estate planning attorney to review how these changes will affect your estate plan.