It’s official. For 2018, the estate and gift tax exemption is $5.6 million per individual, up from $5.49 million in 2017. That means an individual can leave $5.6 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield north of $11 million ($11.2 million) from federal estate and gift taxes. And the annual gift exclusion amount is $15,000 for 2018—up from $14,000 where it’s been stuck since 2013.
The federal estate and gift tax exemptions normally rise with inflation, but theoretically, A tax reform could change all of this. President Donald Trump’s tax reform framework, issued with the GOP last month, calls for the elimination of the federal estate tax, but it’s not a given. “We’ve been down this road before,” says Charles D. Fox IV, an estate lawyer with McGuire Woods in Charlottesville, Va. He says that the latest rumblings indicate that estate tax repeal will end up being sacrificed as Congress focuses on lowering the corporate and individual income tax rates.
So, the wealthy will continue to plan around the estate tax, whittling down their estates with lifetime wealth transfer strategies to keep below the new threshold and avoid the 40% federal estate tax. Now a couple who has used up every dollar of their exemption before the increase has another $220,000 to play with. “If they’re planners, and they’ve used up their lifetime exclusion, they’ll make gifts to vehicles already in place,” says Janis Cowhey, a CPA with Marcum LLP in New York City. For example, if they have a dynasty trust for their offspring, they may put another piece of their business or cash in. Or they can pivot to new strategies. In one case, she has a client planning to use the increased exemption amount to fund a new trust that allows lifetime invasions while he’s alive.
Separately, wealthy folks can make use of the $15,000 annual exclusion amount. You can give away $15,000 to as many individuals as you’d like. A husband and wife can each make $15,000 gifts. So, a couple could make $15,000 gifts to each of their four grandchildren, for a total of $120,000. Lifetime gifts beyond the annual exclusion amount count towards the $5.6 million combined estate/gift tax exemption.
Warning: The $11.2 million number per couple isn’t automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. But to use your late spouse’s unused exemption – a move called “portability”—you have to elect it on the estate tax return of the first spouse to die, even when no tax is due. The problem is if you don’t know what portability is and how to elect it, you could be hit with a surprise federal estate tax bill.
And note, if you live in one of the 18 states or the District of Columbia that levy separate estate and/or inheritance taxes, there’s even more at stake, with death taxes sometimes starting at the first dollar of an estate. However, That number drops to 17 in 2018. Delaware repealed its estate tax effective Jan. 1, 2018. And New Jersey repealed its estate tax effective Jan. 1, 2018, but left its inheritance tax on the books.