New estate tax law exemption amounts
The Tax Cuts and Jobs Act signed into law by President Trump last Dec. 22 ushered in significant changes to the wealth transfer tax system. The sharp increase in the federal exemption amount means that older wills and trusts may be in need of an update. The law also opens new opportunities for estate-planning techniques as well as possible ways to save on future income taxes for your heirs.
What has changed? As of Jan. 1 and up until the new law sunsets on Dec. 31, 2025, the federal estate, gift, and generation-skipping tax exemption amounts have increased to $11,180,000 per individual ($22,360,000 for a married couple), more than doubling the previous exemption in 2017 of $5,490,000 per individual ($10,980,000 per couple). The tax on assets in excess of these amounts remains at 40 percent. The graph below shows the gradual change in the exemption over the past 15 years and its planned sharp decrease in 2026.
– Consider making lifetime gifts and creating trusts now: A married couple can now transfer $22.4 million during their lifetimes with no additional wealth transfer tax. Consider moving assets out of your estate now in order to use your federal gift-tax exemption instead of waiting to use your federal estate tax exemption at death. Any gifts made now will be grandfathered against the exemption coming back down in 2026. There are many estate planning techniques that can be used to get the most out of the new exemption, including generation-skipping trusts, spousal lifetime access trusts (SLATs), grantor retained annuity trusts (GRATs), intentionally defective grantor trusts (IDGTs), as well as others.
– Income tax considerations: Assets removed from your estate with the above techniques can miss out on a big income tax break, however. When passed directly to heirs after death, assets such as stocks, bonds and real estate get a “step-up” in cost basis to the market value on the day the owner died – so heirs selling those assets would pay income tax only on appreciation after the date of death. Assets gifted today, in contrast, don’t get the basis step-up. Therefore, individuals or couples who have total estate assets below the new exemption amounts may want to consider leaving those in their estate – being cautious, of course, that the exemption is scheduled to be reduced again in 2026.
– Other considerations: Many existing wills and trusts include a provision funding a credit shelter trust or by-pass trust with the maximum current exemption amount. These amounts may not have been available to the spouse at death of the grantor. Therefore, these documents may need to be amended given the size of the new exemption amounts. Consider, too, that certain states do not follow the new federal law when assessing their respective state estate taxes. Any new gifting may still create taxes in states that have their own estate tax.
There are many factors to consider when applying the new estate tax provisions.
Hood Craddock is the director of family office services at The Sanibel Captiva Trust Company.