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Tax Cuts and Jobs Act Doubles Estate and Gift Tax Exemptions Through 2025

The Tax Cuts and Jobs Act (“TCJA”), which was signed into law on December 22, 2017, doubles the exemption amount for federal estate, gift, and generation-skipping transfer (“GST”) taxes for transfers made between January 1, 2018 and December 31, 2025. The doubling of the federal estate, gift, and GST tax exemption presents a tremendous opportunity for individuals and married couples with sizeable estates to make large gifts during life, including gifts that transfer appreciating assets out of their estates with techniques such as Grantor Retained Annuity Trusts or sales to Intentionally Defective Grantor Trusts.

Beginning in 2018, the exemption amount for an individual is $11.2 million, which is the amount that can be transferred during life or at death without paying any gift or estate tax. Taxable gifts made in prior years continue to count against the increased exemption amount. The portability (i.e., the amount of exemption transferrable to a spouse if not used by the first spouse to die) of a deceased spouse’s estate and gift tax exemption was not modified by the TCJA. This means that a married couple has a combined $22.4 million of estate and gift tax exemption in 2018 that can be transferred during life or at death without paying any gift or estate tax. The TCJA further provides that the exemption amount will be modified based on an inflation adjustment each year for the next seven years.

Portability of a decedent’s GST tax exemption, however, continues to be disallowed. Thus, individuals with large estates may want to consider using a portion of their increased gift or estate tax exemption to benefit further generations (e.g., grandchildren or more remote descendants) rather than transferring their full exemption to a surviving spouse by taking advantage of portability.

Unless the increased exemption amounts are extended by Congress after 2025, the estate, gift, and GST tax exemptions will drop to 2011 levels, as adjusted for inflation (i.e., $5 million for an individual and $10 million for a married couple). Prior to passage of the TCJA, exemption amounts were scheduled to be $5.6 million for individuals and $11.2 million for married couples in 2018 based on inflation adjustments since 2011. Thus, the exemption amounts in 2026 should be substantially greater than $5 million and $10 million for individuals and married couples, respectively, even if Congress takes no further action.

Passage of the TCJA does not affect state estate taxes, and Wisconsin continues to have no state estate tax. In Minnesota, individuals maintain an exemption of $2.4 million for 2018, with scheduled increases up to $3 million for individuals by 2020. Minnesota still has not adopted portability, which means it is a “use it or lose it” exemption state. Thus, if a spouse dies without using his or her Minnesota exemption, the state estate tax exemption is lost and will not be available for use by the surviving spouse.

If you have any questions related to the increase of these exemption amounts, or for estate planning needs in general, please contact a member of DeWitt’s Estate Planning Practice group in Madison, Metro Milwaukee or Minneapolis to assist you.

About the Author

Jordan Taylor is a Partner practicing out of our Madison office. He is a member of the Trusts & Estates, Business and Real Estate practice groups. Contact Jordan by email or by phone at (608) 252-9369.

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