Love it or hate it, the Tax Cuts and Job Act is now in effect as of Jan. 1.
As pertinent to elder law and estate planning, the act contains important provisions that govern gifting and planning. What follows below are highlights as to how estate plans could be impacted by the Act:
Temporary Doubling Of Gift, Estate And Generation-Skipping Tax Exemptions
The Act doubles an individual’s exemptions for gift, estate and generation-skipping (GST) taxes, increasing the exemption from $5 million to $10 million, as indexed for inflation.
In 2018, an individual’s exemption for gift, estate and GST taxes is just under $11.2 million, and a married couple’s exemption is just under $22.4 million. Property transferred in excess of the exemption will be subject to a 40-percent tax rate.
There is currently no provision for the ultimate repeal of these taxes. The increased exemptions are temporary, however, and will last through Dec. 31, 2025, absent other Congressional action. Barring any other changes, on Jan. 1, 2026, the exemptions will revert to the current $5 million level, adjusted for inflation. These changes create significant gifting opportunities.
Tax Basis Rules Remain Unchanged
Just as before, inherited property will receive a stepped-up tax basis, but gifted property will not. Accordingly, a recipient of gifted property will receive the donor’s tax basis and pay more in capital gains taxes if the donor’s cost basis was relatively low, while the recipient of inherited property will receive a “step up” in tax basis equal to the value on the date of death.
Portability Rules Remain In Effect
Portability is the surviving spouse’s ability to use a deceased spouse’s unused estate and gift tax exemption, and it remains unchanged for gift and estate tax exemptions. However, there is no portability for the GST tax exemptions.
Expanded 529 Plans
These plans are designed to allow tax-free accumulation of savings for education. The new act allows these plans to distribute income tax-free to institutions of higher education, as well as elementary or secondary schools subject to limits of $10,000 per plan beneficiary per year.
This act contains significant tax legislation that offers numerous planning and gifting opportunities for individuals and couples. As a rule of thumb - and in light of these new laws - it is a smart idea to review existing estate planning documents to ensure the documents achieve all possible tax benefits, as well as all non-tax objectives.
Kara Gansmann is an attorney in the Wilmington office of Cranfill Sumner & Hartzog LLP, where her practice encompasses elder law and estate planning. Kara advises individuals and families with estate planning needs and asset protection tactics. In this role, she strategizes with clients to preserve assets for long-term care and to leave legacy gifts to family members. Kara works with elderly clients in need of Medicaid crisis planning and Medicaid applications. As part of her practice, Kara drafts wills, trusts and powers of attorney. In the courtroom, Kara represents clients in the administration of estates, guardianship/incompetency proceedings, and guardianship administration. Kara also litigates estate and trust matters, including will caveats, the modification or termination of trusts, and litigation arising from estate documents or fiduciary roles. She is a member of the North Carolina Bar Association Elder Law and Special Needs Section and serves as co-chair of the CLE Committee for that section. Kara also serves as a liaison between the North Carolina Bar Association Elder Law and Special Needs Section and the North Carolina Bar Association Estate Planning and Fiduciary Law Section.