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Tax Cuts and Jobs Act

Posted: November 6, 2017

House Republicans released their proposed overhaul of the U.S. Tax Code last week.  One of the more controversial aspects of the Bill (known as the Tax Cuts and Jobs Act) is the repeal of both the federal estate tax and the federal generation skipping tax (which is a second tax that is imposed on transfers to grandchildren and more remote descendants).  However, a modified version of the federal gift tax will remain in effect.

Currently, U.S. citizens are allowed to transfer up to $5 million (indexed for inflation to $5.49 million in 2017) of assets free of all transfer taxes.  Married persons can collectively transfer nearly $11 million tax free in 2017. Transfers above that amount are subject to tax at a flat rate of 40 percent. (There are also 15 states and the District of Columbia that assess an estate tax.  These taxes would not be directly affected by the GOP plan.) 

The Tax Cuts and Jobs Act would repeal the generation-skipping tax immediately, and would repeal the federal estate tax in 2024.  The Bill would also immediately double the amount taxpayers can transfer tax free at death to nearly $11 million (indexed) for individuals and $22 million for married couples.  The gift tax would not be repealed, but the amount that every tax payer can give away tax free during life would also be doubled to approximately $11 million, and the maximum gift tax rate would be reduced to 35%.

Surprisingly, the Bill preserves the so-called “basis step-up” rule that increases (or decreases) the income tax basis on inherited assets to the fair market value of the assets on the date of the death of the former owner.  This basis adjustment can result in big tax savings for estate beneficiaries.  Many estate planning lawyers expected the basis adjustment provisions of the Internal Revenue Code would be repealed along with the estate tax.

There are numerous hurdles that need to be cleared before the Tax Cuts and Jobs Act becomes law.  Moreover, what Congress gives, Congress can take away.  So, for at least the time being, we do not advocate that our clients make any changes to their plans in light of the Bill.  If the Tax Cuts and Jobs Act does become law, then consideration should be given to steps that can be taken to lock in some of the opportunities it creates, before the politicians in Washington have a chance to change their minds yet again.

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