We all want to leave a legacy. When it comes to money though, the IRS has some say so, meaning there are some tax ramifications to transferring your wealth. According to the IRS, here are the estate and gift tax limits for 2017, 2018, and 2019 you may need to know.
For individuals, the estate and gift tax exemption limit jumped from $5.46 million in 2016 to $5.49 million this year. That means you can leave your heirs a hefty sum and not pay federal estate or gift tax. If the money is left by a couple, that amount is almost $11 million ($10.98 million). The annual gift exclusion is still $15,000 for 2018.
Inflation played its role by initiating the increase by the IRS. Changes to the estate tax especially matter to those in the upper tax brackets. Whittling down your estate can help you avoid the 40% estate tax. The increase is especially helpful for those that used every dollar of their exemption. They now have an extra $80k to work with. Which means starting a funding a GRAT or starting up a trust could be viable options for sheltering the money.
The federal gift tax and estate tax are married to one another, so the inflation indexing helps too. It gives the wealthy the chance to make the most of tax-free lifetime giving. When you can make gifts during your lifetime keep track of them. They will eventually count against the estate tax exemption amount. For example, if you set up a trust for your kids with $5 million a few years ago, you can make new gifts adding to the trust bringing it up to the $5.49 million amount.
That $11 million for couples may seem great, but don’t let it fool you. As a couple you can each give away $5.49 million, however, the rules are tricky. The husband and wife each get their own exemption, but it’s not automatic. Giving away that money means you haven’t made prior lifetime gifts. You can leave all or part of your assets to your surviving spouse thanks to an unlimited marital deduction. That means there won’t be any federal estate tax. However, if you use portability, the move that allows you to lose your late spouse’s unused exemption, then you have to elect to do so on the estate tax return of the first spouse to die. And that election must be done even when no tax is due. Make sure to discuss this with your planner or CPA. They can help you navigate the murky waters of portability. That will keep you from being hit with a whopping federal estate tax bill that you weren’t expecting.
Another facet to keep in mind, state taxes. If you live in the District of Columbia or one of 18 states that levy a separate estate/inheritance tax then there’s even more at risk. New Jersey just repealed its estate tax beginning next year (2018) but its inheritance tax is the books.
Separate from the lifetime gift exemption is the annual gift tax, which is $15k. That amount has remained constant since 2014 and doesn’t look to be changing anytime soon (remember though always is never always). That means you can give away $15k to as many people as you want. The annual exclusion gifts will not count towards the lifetime gift exemption.
So a married couple can both give away $15k. So if you and your spouse want to gift your six grandchildren with $15k each (perhaps for college), for a total of $180k, that’s absolutely possible. You can sock it away in a 529 college savings plan or fund a trust for them. Those are two great ways to shield your money and set your heirs up for college. Remember though, there’s a federal Kiddie tax covering students through age 23. So when you make some gifts to your children or grandchildren that puts investment income above small amounts into the parents’ tax bracket (if age 23 and below). The child pays no tax on the first $1,050 of unearned income. After that, there’s a 10% rate on the next $1,050, which did not change from 2016. It pays to make gifts early in the year.
Gifts for medical, dental, and tuition expenses made to relatives or friends require no tracking for gift tax purposes if they made directly to the provider. There is no limit to these. You’re free to give away under these circumstances.
As for the politics side of the new limits, President Trump is in favor of repealing the federal estate tax altogether. However, the future of that is limbo with other pressing matters such as healthcare at hand. His plan is to eventually impose a new carryover basis regime for estates topping $10 million.