It was good news for the wealthy—the Tax Cuts and Jobs Act (TCJA) amped up the unified federal estate and gift tax exemption to $11.4 million for 2019 (and up to $11.18 million in 2018). If that wasn’t generous enough, those exemptions will be increased annually for inflation from 2020 to 2025. As comedian Mel Brooks would say, “It’s good to be the king.”
MarketWatch’s recent article, “How single folks should handle estate-tax planning under the new tax law,” explains that taxable estates above the exemption will have the excess taxed at a flat 40% rate. An individual’s cumulative lifetime taxable gifts in excess of the exemption are taxed at the 40% rate. Likewise, taxable gifts are those that are more than the annual federal gift tax exclusion of $15,000 for 2018 and 2019.
The TCJA has good news for those with larger estates. However, many estate plans need updates to take advantage of the dramatically increased exemption amounts. Let’s take a look at what unmarried individuals should know.
If your estate is valued below $11.4 million and you die in 2019, all that you own can be left to family and friends, without any federal estate taxes. However, that doesn’t necessarily mean you don’t need an estate plan. If you have minor children, you should have a will to designate a person to be their guardian, if you pass away. You also need a will if you want to leave specific property to certain individuals. Review your estate planning documents with your attorney, because they may be outdated.
If your estate is more than $11.4 million, up to that amount can be left to family or others without any federal estate taxes. However, if you leave more than that, there’ll be federal estate taxes. The taxable value of your estate may be decreased by donations, if the executor of your estate is directed to make donations to IRS-approved charities (but that means leaving less for relatives and loved ones). Here are some other things you can do to reduce your taxable estate:
- Make annual gifts to relatives and friends. The annual federal gift tax exclusion of $15,000 allows you to make annual gifts to an individual gift recipient, up to that amount and reduce the taxable value of your estate, without reducing your unified federal estate and gift tax exemption.
- Pay college tuition or medical bills for others. You can also give away unlimited amounts for these purposes, without reducing your unified federal estate and gift tax exemption, provided you make the payments directly to the college or medical service provider.
- Gift appreciating assets to family and friends, while you are still alive. With the unified federal estate and gift tax exemption, you can gift up to $11.4 million worth of appreciating assets (e.g., stocks and real estate) in 2019, without any federal gift tax liability. This is beyond anything given away in the first two categories.
Remember, if you do make gifts in excess of the annual exclusion amount, that will reduce your unified federal estate and gift tax exemption dollar-for-dollar.
Regardless of these ever-growing exemptions, wealthy and regular folks still need to have an estate plan in place. That includes a will, naming a guardian if your children are minors, Power of Attorney, Health Care Proxy and other legal documents, depending on your situation. An experienced estate planning attorney will help, at any asset or income level, to create a plan to protect the family.
Reference: MarketWatch (December 10, 2018) “How single folks should handle estate-tax planning under the new tax law”