Understanding the New Tax Code: Changes to the Federal Estate Tax

By Robert J. Hughes  |  April 26, 2018

The Marks Paneth blog series entitled “Understanding the New Tax Code” is designed specifically for high-net-worth individuals in terms of helping them prepare and file their taxes and develop strategic tax plans. This post deals with changes to the federal estate tax coming out of the Tax Cuts and Jobs Act of 2017.

The tax laws that deal with taxable transfers of property from a deceased individual to their heirs have been in flux over the years, and the application of the federal estate tax has often varied from one year to the next. 2018 will be no different, given the changes included in the recent federal tax reform bill.

Most Americans will never encounter the estate tax because their taxable assets do not exceed the exemption amount, set at $5,490,000 in 2017. According to the IRS, relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no specific deductions or elections, or jointly held property) do not require the filing of an estate tax return. As a result, the estate tax only affects approximately two percent of the nation’s wealthiest individuals.

 

Estate Tax Law Changes  

Under the Tax Cut and Jobs Act, Pub. L No. 155-97, the estate tax exemption nearly doubles (before considering the necessary inflation adjustment). The new filing threshold for 2018 – which includes the inflation adjustment – is $11.18 million per taxpayer and $22.36 million per married couple, making this a “big win” for many high-net-worth families.  

Anything above these amounts is subject to the 40 percent federal estate tax.

 

Potential Estate Planning Impact

The doubling of the exemption base creates an opportunity for taxpayers who used the entire $5.49 million lifetime exemption by 2017 to gift an additional $5.7 million per individual tax-free. For taxpayers who did not use the maximum amount of their exemption in 2017, the unused amount will continue to be available as well.

 

State Estate Taxes

According to the Joint Committee on Taxation, the federal estate tax of 40 percent on assets above $11.18 million will affect only 1,800 estates nationwide in 2018. However, many more taxpayers will still be subject to estate tax laws on the state level.

How much money affluent people can leave to their heirs free of state estate tax depends on where they live and own property, to whom they are leaving money, and if their estate planning is up-to-date.

Consider the estate tax situation in the metro NYC area:

NY State

  • Exemption amount: $5.25 million
  • Top Estate Tax Rate 16%
  • 2019 scheduled to match prior federal tax law of $5 million – indexed for inflation

New Jersey

As of January 1, 2018, New Jersey has eliminated the state estate tax. The state’s inheritance tax may still apply, however, depending on an heir’s relationship with the decedent.

Connecticut

  • Exemption amount: $2.6 million
  • Top Estate Tax Rate: 12%
  • Cap: $15 million
  • 2019: $3.6 million exemption
  • 2020 scheduled to match federal exemption amount

 

Timely Action Needed

It should be noted that this big tax break may only be available for eight years or until 2026 – when the exemptions will return to pre-2018 levels. Many high-net-worth individuals have estate plans that use tax-based formulas, so these plans should be reevaluated in context of the doubled exemptions.

It is important to note that the new tax law does not change the “step-up” basis at death, which means that when an affluent person dies, their heirs’ cost basis for the inherited assets is reset at current market valuations.

 

If you have any questions, please contact Robert J. Hughes, Principal-in-Charge of the High-Net-Worth Group at Marks Paneth.

Phone: (212) 503-8942 | rhughes@markspaneth.com

 

This material has been prepared for general informational and educational purposes only and is not intended, and should not be relied upon, as accounting, tax or other professional advice. Please refer to your advisor for specific advice.   

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About Robert J. Hughes

Robert Hughes, EA, is Principal-in-Charge of the High-Net-Worth Group at Marks Paneth LLP. In this capacity, he handles state, local and federal tax filings, specializing in high-net-worth individuals, estates, trusts and private foundations. Mr. Hughes began his career with the IRS where he progressed from an entry-level position in the error correction department to a senior position as Office Auditor. He also has extensive experience working in the tax departments of several high-profile banks where... READ MORE +


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