By: Sam Skorepa
With Donald Trump being sworn in as the 45th President of the United States last week and Republican control of both the House and the Senate, the next four years seem ripe for major changes to the Estate and Gift Tax transfer system. As a candidate, President Trump previously proposed the repeal of the Federal Estate Tax, a move that has long been discussed among many circles for a variety of reasons and has been gaining traction recently in light of the fact that the Federal Estate Tax Exemption has risen dramatically over the last decade. Questions still remain as to whether the Gift Tax will also be repealed or modified if the Estate Tax is repealed.
Many clients have a fear and/or hatred of the Estate and Gift Tax system, but in reality the current Estate Tax regime affects very few individuals. For Example, in 2015 only 4,918 estates nationwide paid an Estate Tax, which was a decrease from the 2014 number of 5,158 estates (roughly 0.2% of total deaths that year).
Some Estate Planning experts are advising clients to take a “wait and see” approach to watch whether President Trump and Congress will follow through on the repeal of the Estate Tax. Which begs the question: why? If so few individuals are subject to paying estate tax under the current system, that advice seems to benefit only those individuals subject to the tax or those who are engaging in Estate Tax saving planning. For the rest of us, Estate Planning is still important regardless of the tax system in place.
BOTTOM LINE- Don’t sit on the sidelines, be informed. It is important to review your Estate Plan in light of the current changes to the law (as discussed below) as well as the potential future changes that may affect your planning.
If Congress and President Trump make no changes to the Estate and Gift Tax system, here are the facts for 2017:
• Slight Increase to Federal Exemption Amount
Federal estate and gift tax laws limit the amount that can be transferred to the next generation and other third parties (excluding the spousal exemption). In 2017, the federal Exemption Amount increased from $5.45 million in 2016 to $5.49 million for each individual.
• No change to Annual Gift Exclusion Amount
Section 2503 of the Internal Revenue Code provides for an exclusion to “taxable gifts” so long as those gifts meet certain requirements. For 2017, the annual exclusion amount remains at $14,000 per person, the same level it has been since 2013. Some commentators are projecting an increase in 2018.
• Portability Remains Intact.
Consistent with the estate tax laws from 2011 forward, the unused Exemption Amount is no longer lost if unused and remains “portable” for use by the surviving spouse, which means the Exemption Amount is effectively $10.98 million per couple. However, portability must be elected upon the death of a spouse and to do so, certain requirements must be carefully and timely followed.
• Consistent Tax Rate
There is no increase in the effective tax rate for lifetime gifts and distributions, which remains at 40% of the taxable amount once the Exemption Amount has been exceeded.
Estate Planning is something everyone should consider, regardless of your wealth or station in life. Working with an attorney to create a plan that fits your needs is important. Reviewing your plan on a regular basis is just as important. Consider changes in the law, family situations, and major life events when deciding whether a review of your Estate Plan is necessary. We recommend every three to five years at a minimum as a best practice.
Sam helps clients with estate planning, probate and trust administration, and real estate matters. When not practicing law, he can be found enjoying Quad Cities restaurants or spending time with his wife and two daughters.