Increases to the annual gift tax exclusion, and the U.S. estate tax, gift tax, and generation-skipping transfer tax (GST) exemptions are projected for 2018, providing favorable opportunities for tax-efficient wealth transfers.
A major goal for many of our clients is the tax-efficient transfer of wealth to children and other descendants. In 2017, an individual can transfer up to $5,490,000 of assets, during life or upon death, without federal estate or gift tax liability. A married couple can combine their estate and gift tax exemption amounts and transfer up to $10,980,000 of assets without incurring federal estate or gift tax. Anything above the exemption amount is subject to estate or gift tax at a rate of 40 percent.
Annual gifting is a simple and effective tool for reducing the size of one’s estate without incurring any gift or estate tax, or reducing one’s estate and gift tax exemption amount. In 2017, a taxpayer can gift up to $14,000 ($28,000 for a married couple) to as many individuals as desired, without drawing down on his or her estate and gift tax exemption. This gift is commonly referred to as an annual exclusion gift. The gift must be of a present interest, rather than the right to receive the asset in the future.
Gifts above the $14,000 annual exclusion amount will draw down on the taxpayer’s estate and gift tax exemption amount. Nevertheless, gifts above the annual exclusion amount may still be beneficial in that the donor effectively removes the appreciation on those assets from his or her gross estate.
In addition to annual exclusion gifts, an individual may further reduce his or her gross estate without reducing his or her estate and gift tax exemption by making direct payments for any other individual’s education or medical expenses. Combining regular annual gifting with the so-called “med-ed” exception from gift tax can result in significant estate tax savings at one’s death.
Although the Internal Revenue Service generally releases the upcoming year’s exemptions and exclusion amounts later in the fall, Bloomberg BNA recently made projections for 2018 based on data derived from the U.S. Department of Labor’s Consumer Price Index. According to Bloomberg BNA, the annual gift tax exclusion amount will increase from $14,000 to $15,000 in 2018. In addition, the estate and gift tax exclusion amount is expected to increase from $5,490,000 to $5,600,000. As a result, a married couple will be able to transfer up to $11,200,000 without incurring federal estate or gift tax liability. The GST exemption, relevant for transfers to or for grandchildren and more remote descendants, also will increase in step with the increase to the estate tax exclusion amount.
While the estate and gift tax exemption amount has increased annually, this represents the first increase to the annual gift tax exclusion since 2013. For those clients with larger estates, we recommend they take advantage of the opportunity to transfer additional wealth without federal estate or gift tax consequences.