02 November 2017

The Tax Cut and Jobs Act (H.R. 1): The Estate Tax Provisions

House Republicans have released the full text of their tax bill, a good summary of which is available at the Tax Foundation.

In the area of estate planing, the bill increase the exemption from the estate tax, which is currently $5.49 million for 2017 per person, per lifetime for taxable gifts and all assets owned at death (for estate tax purposes) combined, with unused portions inheritable by a surviving spouse, to $10 million (indexed for inflation) for the years 2018 through 2023. After that the estate and generation skipping transfer tax are abolished and only a gift tax with a $10 million lifetime exclusion remains. The step up in basis of capital assets at death remains.

So, there is a tax break for heirs of estates of more than $11 million (which is 100% for estate of less than $20 million) for six years, followed by a complete elimination of the estate tax for people who die in 2024, if Congress doesn't change its mind before then.

Since indefinite deferral of rolled over capital gains from real estate are retained and the step up in basis at death is retained, this means that a married real estate investor can make up to $20 million of capital gains from real estate investments in a lifetime, entirely tax free, and pass those gains onto his or her children entirely tax free who can the liquidate the real estate and spend it any way that they like.

For the vast majority of Americans, who expect to have a family net worth of under $11,000,000, the new estate tax law changes nothing.

The incentive to make charitable gifts from large estates is further reduced.

The threshold at which it starts makes sense from a tax perspective to make gifts during life rather than at death (which I call the transition from the "Scrooge" regime to the "Santa Claus" regime) shifts from about $14 million of net worth to about $25 million of net worth.

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