The Tax Cuts and Jobs Act that passed in December made some major changes to laws surrounding federal estate and gift taxing— changes that might turn out to be great news for those concerned about their legacy planning.
When one passes money on after their death or gifts money during their life, this money is subject to federal and state taxes. Before the historic tax reform passed at the end of last year, there was an exemption to these estate and gifting taxes up to $5.6 million for individuals or $11.2 million for married couples. Now, however, the amount of this exemption has been doubled, which is great news for those seeking to gift or pass on larger amounts of money than the previous exemption amount.
This new exemption amount (now $11.2 million per individual or $22.4 million for married couples) is temporary, however, like many of the other changes from the tax reform. The new exemption amount will be in effect for only 8 years. So, this higher state tax exemption will only affect individuals who die before December 31, 2025.
However, there is a way for those who die after the 8 year exemption period to benefit from the current higher rate. And it can be done by using the gift tax exemption.
The higher gift tax exemption is also valid for an 8 year period. So those looking to maximize their estate tax exemptions could gift a large amount (one still under or equal to the exemption amount) to an estate tax-proof trust to avoid federal or state taxes upon their death.
State taxes are a consideration for those without tax-proof trusts. The new large exemption is a federal exemption that does not apply to state taxes. Fifteen states and the District of Columbia have estate taxes, so those would still apply regardless of the larger federal exemption. A gift tax would also apply at the state level, though the only state with a gift tax is Connecticut.
The changes to the estate and gift taxes are another new element to take into consideration when doing taxes in the upcoming years. Like so many other laws brought about by the Tax Cuts and Jobs Act, these changes are temporary, which can be confusing. If you’re concerned about how the estate and gift tax changes— or any of the other changes from the tax reform— might affect you, reach out to one of our tax experts today. The certified tax experts at Vanguard Tax Relief know every aspect of tax law, new and old, and can help you clear up any tax-related issue.