The Tax Cuts and Jobs Act (TCJA)was signed into law on December 22, 2017. New Jersey has repealed its estate tax effective this year. Both will impact many estate plans.
The federal estate, gift and generation-skipping transfer (GST) tax exemptions has doubled to $11,200,000 per individual. Thus, a married couple will have combined exemptions of $22,400,000 in 2018. The exemption amounts will revert to the pre-2018 levels starting in 2026. The estate, gift and GST exemption amounts will continue to be adjusted for inflation. Under the TCJA, however, the adjustments will be based on a measure called the chained consumer price index (chained CPI), which will likely result in smaller adjustments than under the pre-2018 law. The top federal rate for estate, gift and GST taxes will remain at 40% under the TCJA. The annual gift tax exclusion amount will increase to $15,000, and will also continue to be adjusted for inflation pursuant to the chained CPI.
New Jersey’s estate tax is repealed as of January 1, 2018, but speculation is further legislative action may be taken at some point. The New Jersey inheritance tax remains in effect, and is applicable on inheritances passing to siblings, nieces, nephews, and other unrelated individuals. Thus, bequests to certain beneficiaries may still be subject to inheritance tax despite the changes to New Jersey’s estate tax, between 11% and 16%.
The now increased federal exemption amounts present estate planning opportunities for many. The TCJA now provides for additional gifts of approximately $11,000,000, which can also be utilized to make additional gifts to trusts in existence. Conversely, many for whom the federal estate tax is no longer a concern because of the increased exemption amount should consider whether a simplified plan is now more appropriate for their families.
It is time to revisit your estate plans since the increased exemption amounts may result in unintended consequences. Bequests that use formulas based on specific exemption amounts may no longer be appropriate and, for example, could result in a larger amount of a certain estate passing in trust than planned, especially where many estate plans provide for the available exemption amount to be passed on to children or grandchildren, with the balance to the surviving spouse. Thus, with a now increased exemption amount, this could result in a larger than planned for portion of the estate assetts passing to said children and grandchildren, with a smaller than planned for amount being available for the surviving spouse.
Grantor retained annuity trust (GRAT) is a straightforward way to take advantage of low applicable federal rates with nominal risk. A properly drafted GRAT can pass on appreciation in transferred assetts to an individual’s children or grandchildren at a minimal or zero gift tax cost, as the Service assumes the growth rate and does not consider taxable the actual growth of the assets. Said appreciation in excess of the the rate can be passed on to beneficiaries free of gift and estate tax. A GRAT is an considerable strategy in low interest rate environments where there is potetnial for more growth in excess of the Service rate can result in a larger potential tax free gift.
If you wish to discuss reviewing of your estate or other personal or business tax planning call us directly at 856.428.5577.