As many are likely very aware, the end of 2017 brought with it new tax reform that took effect January 1, 2018. The Federal Tax Cuts and Jobs Act (the “Act”) made many revisions to the tax code in the first significant reform to the tax code since 1986. This article will focus on the impact the Act has with regard to estate and gift taxes.
Changes to Federal Transfer Tax Laws
Previously, an individual was able to transfer up to $5.49 million without any worry of Federal gift, estate or generation skipping transfer taxes (collectively referred to as “transfer taxes”) during life, at death, or by combination of the two. Married couples could transfer a combined $10.98 million free of transfer taxes. Any assets transferred beyond those exempt amounts were subject to a 40% tax
The Act provides for a doubling of the exemption amount to roughly $11.2 million per person, adjusted annually for inflation. Married couples will now be able to effectively transfer a combined $22.4 million free of transfer taxes. This doubled exemption is scheduled to remain in effect for 8 years and will sunset at the end of 2025, if the federal government does not act sooner. Property transferred in excess of the increased exemption will continue to be taxed at a rate of 40%.
Individuals are also offered an annual exclusion from gift tax for direct gifts to individuals or certain trusts. In 2017 this exclusion was $14,000.00 per recipient, per year. In 2018, the IRS raised the annual gift exclusion to $15,000 per recipient. A married couple may combine their individual exclusions to allow for tax-free gifts of $30,000 per recipient. This scheduled change is due to inflation and not the new legislation and follows the IRS’s pattern of raising the annual exclusion every three (3) to four (4) years based on inflation.
It is important to note that the rules regarding basis for gifted assets versus inherited assets will remain the same. A donor’s basis in property which is gifted will “carry-over” to the gift recipient while property owned at death will receive a “step-up” in basis equal to the date of death value. Therefore, individuals will need to consider if it is more advantageous to gift property during their lifetime or wait for the step-up in basis that would occur at the time of their death.
Changes to New York State Transfer Tax Laws
New York estate and gift tax continues on in its previous form adopted in 2014. There continues to be no New York gift tax and the exemption from the New York estate tax will continue to be $5.25 million through the end of 2018. The exemption will rise for decedents dying on or after January 1, 2019 and it is estimated that the exemption will be between $5.6 million and $6 million at that time. Estates in excess of the exemption will continue to be taxed at a maximum rate of 16%. The unique estate tax “cliff” in New York will continue such that there is no exemption for estates exceeding the NY exemption amount by more than 5%.