One of the measures of the Tax Cuts and Jobs Act (TCJA) is to up the unified federal estate and gift tax exemption to $11.18 million for 2018 and $11.4 million for 2019. It will also rise with annual inflation adjustments for 2020-2025. However, beginning January 1, 2016, unless Congress changes the law, the federal estate and gift tax exemption amounts are expected to be reduced to $5,000,000 per person plus an inflation adjustment.
MarketWatch’s recent article, “How single folks should handle estate-tax planning under the new tax law,” explains that taxable estates above the exemption will have the excess taxed at a flat 40% rate. An individual’s cumulative lifetime taxable gifts in excess of the exemption are taxed at the 40% rate. Likewise, taxable gifts are those that are more than the annual federal gift tax exclusion of $15,000 for 2018 and 2019.
The TCJA has good news for those with larger estates. However, many estate plans need updates to take advantage of the dramatically increased exemption amounts. Let’s take a look at what unmarried individuals should know.
If your estate is valued below $11.4 million and you die in 2019, all that you own can be left to family and friends, without any federal estate taxes. However, that doesn’t necessarily mean you don’t need an estate plan. If you have minor children, you should have a will to designate a person to be their guardian, if you pass away. You also need a will if you want to leave specific property to certain individuals. Review your estate planning documents with your attorney, because they may be outdated.
If your estate is more than $11.4 million, up to that amount can be left to family or others without any federal estate taxes. However, if you leave more than that, there’ll be federal estate taxes. The taxable value of your estate may be decreased by donations, if the executor of your estate is directed to make donations to IRS-approved charities (but that means leaving less for relatives and loved ones). Here are some other things you can do to reduce your taxable estate:
- Make annual gifts to relatives and friends. The annual federal gift tax exclusion of $15,000 allows you to make annual gifts to an individual gift recipient, up to that amount and reduce the taxable value of your estate, without reducing your unified federal estate and gift tax exemption.
- Pay college tuition or medical bills for others. You can also give away unlimited amounts for these purposes, without reducing your unified federal estate and gift tax exemption, provided you make the payments directly to the college or medical service provider.
- Gift appreciating assets to family and friends, while you are still alive. With the unified federal estate and gift tax exemption, you can gift up to $11.4 million worth of appreciating assets (e.g., stocks and real estate) in 2019, without any federal gift tax liability. This is beyond anything given away in the first two categories.
Remember, if you do make gifts in excess of the annual exclusion amount, that will reduce your unified federal estate and gift tax exemption dollar-for-dollar.
Although the TCJA improved your federal estate and gift tax situation for 2018-2025, planning is always necessary to get optimal results. Your estate planning attorney can assist you.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: MarketWatch (December 10, 2018) “How single folks should handle estate-tax planning under the new tax law”