When the president signed into law the Tax Cuts and Jobs Act (TCJA) in 2018, it more than doubled the federal estate and gift tax exemption. The legislation currently allows a person to transfer up to $11.4 million by way of gifts or as part of an estate. Married couples may transfer as much as $22.8 million free of estate or gift taxes, but a sunset provision in the law means the exemption for an individual will revert to its pre-2018 level of $5.49 million on January 1, 2026. Unless Congress acts to change it, you have only five years remaining to take advantage of the substantial benefit of the TCJA. Five years may seem to be more than enough time to get together with your attorney for a review your estate plan to take full advantage of the higher exemption, but keep in mind the exemption could disappear sooner through legislative action after the 2020 national elections.
Reducing the Value of Your Taxable Estate
Gifting assets during your lifetime instead of waiting to give it as part of your estate after your death allows you to see and enjoy the benefit the recipient derives from receiving it. It immediately reduces the value of your taxable estate by the amount of the gift while also ensuring that future appreciated value of the asset does not become part of your estate.
Taking full advantage of the current amount of the estate and gift tax exemption allows for estate tax savings that may not be available five years from now, particularly in light of our record-high budget deficit which will eventually need to be paid down through tax revenues. Assets that you retain in your estate instead of making gifts during your lifetime will [hopefully] grow in value resulting in an increase in the size of your estate at death. Loss of the enhanced estate tax exemption at the end of 2025 could cause your estate to pay more taxes than had you gifted away part of it.
Using a Trust to Take Advantage of the TCJA
It is perfectly understandable to have reservations about the ability of the recipient of a gift not to squander or mismanage it. An irrevocable trust may offer a sound alternative to an outright gift. And, certain irrevocable trusts can provide income to you, your spouse, your children and/or your grandchildren whilst still removing the assets from your “estate”.
A gift made to an irrevocable trust with the intended beneficiary of the gift named as the beneficiary gives you the peace of mind of knowing the assets are managed by a trustee of your choosing according to the rules you established when the trust was created (so long as they comport with state law and the IRC). An estate planning attorney can offer advice and guidance about creating an irrevocable trust to take full advantage of the current estate and gift tax exemption and can even set up certain trusts to provide income to one class of people and distributions of principal to another class.
What the State Does Could Affect Your Taxes
Getting your estate plan in order sooner than later should not focus only on federal law. Earlier this year, a bill was introduced in the California legislature to impose a state tax on estates valued in excess of $3.5 million. The measure was not approved, but the effort to impose taxes at the state level coupled with the fast-approaching end to the enhanced federal estate and gift tax exemption should be incentives for someone to move quickly to take advantage of the tax benefits currently available to them.
Get Advice from an Orange County Estate Planning Attorney
The estate planning attorneys at NM Law have the knowledge and experience to offer advice and guidance to individuals concerned about the impact of current federal law on their estate plans. Let them help you take full advantage of the current tax laws by calling them today at (949) 253-0000 to schedule an appointment.
Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.