With all the media coverage in the last couple of months, you have certainly heard at least tidbits about the new Tax Cuts and Jobs Act (Act), signed by the president in December. One of the most important provisions of the Act for high net worth (HNW) families is the increased exemption amounts for estate, gift and generation-skipping transfer (GST) taxes.
HNW Families Should Take Advantage of the Increased Tax Exemptions for Gifts
Wealthy families should look at ways to take advantage of the significantly higher estate, gift and GST tax exemptions contained in the Act. In fact, if you have not made prior taxable gifts, you can gift up to:
- $11,180,000 in 2018 as an individual
- $22,260,000 in 2018 as a married couple
This also means that if you have already used your full gift tax exemption in previous years, you are still eligible to transfer an additional:
- $5,690,000 in 2018 as an individual
- $11,380,000 in 2018 as a married couple
Keeping in mind that the Act sets an expiration date of December 31, 2025, for the increased exemptions (and noting that any upcoming change in political power could hasten a decrease in exemption), your ability to benefit from these changes is quite possibly a limited-time offer. In 2026, the lower $5,000,000 exemption (adjusted for inflation) is scheduled to return.
HNW Families Should Utilize Annual Exclusion Gift Strategies
Another opportunity for giving (which doesn’t require incurring a gift tax or using any of your gift tax exemption amount) is through Annual Exclusion Gifts. The amount that a person can give annually to another person (or to as many people as desired) has increased under the Act to $15,000 per donee. In other words, a donor can give as many gifts valued at $15,000 to as many donees as he or she wishes, and a married couple could double their gifts to give $30,000 per donee. While it is easiest to give gifts of cash directly to adult donees, it is also possible, under certain circumstances, to make such gifts using non-cash amounts, in trust or to minors.
If you are making annual exclusion gifts to minors, you have several options, including:
- “Crummey” Trusts (whereby each beneficiary has a limited withdrawal right upon contribution to the trust)
- Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts
- 529 Plans and other college savings accounts (under the Act you can also now fund up to $10,000 per year per student for tuition, fees, books and related expenses for elementary and secondary students)
- 2503(c) Minor’s Trusts
HNW Families Gain Tax and Other Benefits from Giving Now Rather Than Later
Some of the planning strategies work better when interest rates are low, as they are now. With rates currently on the rise, this is a reason to act sooner rather than later.
- With GRATs and sales to grantor’s trusts for a promissory note, for example, the lower the “hurdle” or interest rate is at the time the trust is established, the better chance for the return earned on the assets held by the trust to exceed that initial interest rate, thereby allowing all returns above the hurdle rate to be passed, transfer tax free, to the beneficiaries.
Transferring an asset earlier means that subsequent appreciation will occur outside of your estate.
- This may result in a greater benefit to the recipients of the gift. This can also result in significant tax savings for the donor of the gift.
There could be other tax benefits to assets given during your lifetime.
- Assets given during your life will not be subject to state inheritance or estate taxes, and in almost all cases gifted assets will not be subject to a state level gift tax. If you are a resident of a state which has an estate or inheritance tax (or both), such as New York or Illinois, this could be an important tax savings strategy. Michigan currently does not assess an estate or an inheritance tax.
Quite importantly, gifting assets earlier helps prepare the next generation.
- Receiving some wealth now may help younger family members become familiar with the investment process, trust administration and tax strategies, which will help them gain the skills to handle a larger inheritance in the future. Keep in mind that Warner has attorneys who specialize in preparing the next generation for wealth management and we would be delighted to assist your family.
- Finally, making lifetime gifts to children and grandchildren now may help them when they need it most. Plus, you can participate in the enjoyment of the gift while you are alive!
Wondering about Other Benefits of Tax Reform for HNW Families?
This Act contains a variety of changes that can affect your wealth and business decisions this year. Don’t hesitate to contact your Warner attorney, or an attorney in our Private Client and Family Office practice, including this blog post’s author, Laura Jeltema, or our practice chair, Mark Harder, for assistance.