On December 22, 2017, the law known as the 2017 Tax Cuts and Jobs Act, enacted by Congress as Public Law 115-97, made major changes to the federal gift and estate tax laws. In this article, we discuss some of the most important changes which will be encountered by Maui residents planning their estates.
Gift Tax Annual Exclusion. The gift tax “annual exclusion” is a threshold amount used to determine whether gifts made during one’s lifetime need to be reported to the IRS. This provision was not changed by the Tax Cuts and Jobs Act. Commencing as of January 1, 2018, the annual exclusion was increased from $14,000 to $15,000. In most cases, this generally means that outright gifts totaling more than $15,000 by a donor to any one donee in a calendar year, must be reported to the IRS. Likewise, outright gifts totaling less than $15,000 to any person in any calendar year usually do not have to be reported. While this is only a modest amount, it should be recognized that the increase applies to each donee. There is currently no limit to the number of donees who can receive gifts under the annual exclusion. As such, when used properly, the annual exclusion can be a very important tool to accomplish one’s objectives.
Applicable Exclusion Amount. This figure is used to determine whether federal gift tax is payable, or upon death whether an Estate Tax Return must be filed and estate taxes paid. Commencing as of January 1, 2018, the applicable exclusion amount was increased under the Tax Cuts and Jobs Act from $5.49 million to $11.18 million for each donor. Therefore, for example, with proper planning, a married couple may be able to pass up to $22.36 million of value without being subject to estate taxes.
Generation Skipping Tax Exemption. The generation skipping tax exemption is a threshold amount for determining whether generation skipping tax must be paid on gifts to donees who are two or more generations from the donor. Under the Tax Cuts and Jobs Act, the generation skipping tax exemption is expected to increase from $5.49 million to $11.18 million for each donor. When used properly, this could therefore enable a married couple to pass up to $22.36 million of gifts to donees who are two or more generations in age from the donor.
While the amounts of the exclusions above are very large, it would be a mistake to presume that gift, estate and generation skipping taxes no longer need to be considered by Maui residents as part of their estate planning. In part, this is because the increases made under the Tax Cuts and Jobs Act will “sunset” and therefore end on December 31, 2026, unless extended by the U. S. Congress. It is, of course, also possible that the amounts discussed above will be reduced by further federal legislation.
It is always best to consult with your estate planning attorney for assistance with understanding how these concepts work and should be considered. This is also important for Maui residents who already completed their estate planning, given that estate planning documents should be updated on a regular basis to address changes in one’s desired plan of distribution, property values and laws. Similarly, regular contact with one’s Certified Public Accountant, Enrolled Agent, or other tax advisor is now more important than ever, because of important changes to the federal income tax laws made by the Tax Cuts and Jobs Act.
Note: The information in this article and throughout this website is not intended, and should not under any circumstances be interpreted, as legal advice. This article is intended only as a general discussion, and should not be read or viewed as a comprehensive analysis of all relevant aspects, of each topic discussed. The reader is encouraged to consult with legal counsel for assistance with any aspect of the estate planning process, and any other matter of a legal nature.