How the Tax Cuts and Jobs Act affects your gifts and bequests
When the Tax Cuts and Jobs Act was signed into law in 2017, it doubled the amount an individual can give through lifetime gifts or bequests without paying a Gift Tax. But before you take advantage of this change to transfer your wealth tax-free, there are several important factors to consider.
First, look at the numbers.
The Act increased the lifetime exemption amount from $5 million to $10 million. But this number also is adjusted for inflation, so the exemption for 2019 is actually even higher at $11.4 million. That means that right now, you can give away up to $11.4 million during your lifetime as a tax-free gift. Just remember, you’ll need to file a gift tax return (IRS form 709) with the IRS for anything over $15,000 in a year. (That $15,000 is the annual gift exclusion. You can gift up to $15,000 each year to as many individuals as you like without incurring a taxable gift.)
Keep in mind that this higher exemption won’t last forever.
In fact, the Act is scheduled to sunset at the end of 2025, at which time the limit will drop back down to $5 million in lifetime gifts. Using the current gift exemption as fully as possible now can help you lock in that lifetime gift exemption even after it reverts. That means you have more opportunity to transfer your wealth to another generation and expose less of your estate to a 40-percent federal estate tax. Plus, by making the gift now, you’ll have a chance to see how your family uses the funds.
Additional regulations have been proposed.
These would address situations where gifts up to $11.4 million are made now, then transfers are made either before or at death, if the lifetime limit has then dropped to $5 million. To prevent your estate from having to pay taxes on the additional gifts made now as part of the estate tax, the proposal would exempt (through its estate tax credit) the greater of the two—either the exemption amount at the time of death or the one that was allowed when the gifts were made.
Plan your lifetime gift carefully.
Many people are concerned about lifetime gifting as an estate planning tool. They worry about the recipient’s age, or spouse, or ability to manage money. That’s why gifts to trusts can be the most powerful way to leverage the lifetime gifts. By gifting to a trust, you can set the rules about how the money is invested, spent on the beneficiary, and is used. The same applies to gifts to grandchildren or great grandchildren since the generation-skipping transfer (GST) tax exemption also increased to $11.4 million under the Act. By making gifts to trusts that are exempt from GST, the client can pass wealth down from generation to generation free of transfer taxes. Additionally, the tax and estate planning opportunities in the Act make dynasty trusts something to consider when planning for future generations.
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