Opportunities for lowering wealth transfer taxes

Alisa Shin discusses the opportunities the new tax bill can provide for lowering the taxes associated with wealth transfer.

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Talli Sperry: Okay, so let’s take another one of our presubmitted questions while we’re waiting for our audience. So this one comes from Robert in Hillsborough, California, and he’s asking, “Is there a change in the annual gifting amount?” So, Alisa, you were just kind of getting to that, so I think I’m going to turn this one to you because he’s asking, “Does the change in the estate tax exemption alter the change in the cost basis of estate assets?”

Alisa Shin: Sure, and so I actually think we have a chart that we can pull up, the estate and gift tax chart. But to answer his first question, the amount that each person can give each year, which is commonly called the annual exclusion gift, did change, not because of the tax law change, but just by inflation adjustment. So instead of it being $14,000 a year per person, per donor or per donee, it is now $15,000 a year. So there was a slight increase in that amount.

Before I answer the question about the basis, it might be worth it just to talk a little bit more about how the estate tax laws changed. We used to be in a world, pre this new tax law, where you could give up to $5.49 million free of the federal estate tax; and the top estate tax rate was 40%. As a result of the new law, Congress actually doubled the exemption. Now I need to make one quick correction on our chart because it was a very recent change and everything had been uploaded already so we could not make the change quick enough.

The new exemption for 2018 is not $11,200,000. It’s actually $11,180,000.

Talli Sperry: Thanks for clarifying. That’s important.

Alisa Shin: That is important. It’s a little bit of a difference. A lot of people were saying the

$11.2 million number, that was based on the old way the CPI was calculated. The new tax law changed how we apply the CPI to—

Talli Sperry: CPI, just for our viewers who aren’t familiar—

Alisa Shin: It’s the Consumer Price Index, which is used to adjust the numbers based on inflation. And so now they’re using what they call chained CPI. So as a result of the new calculation, literally in the last probably 24–48 hours or so, we were told that the exemption will now be $11,180,000. The tax rate stayed the same. The top tax rate is still 40%. And with this new law, they actually did not do anything with the basis rules, meaning that if you die owning assets, your beneficiaries will receive what they call a step-up in basis so that your beneficiaries’ basis becomes the value of that asset on the date of your death, so there’s still a win there. That was not taken away.

Talli Sperry: That’s great. And I just want to clarify, when you say $14,000 or $15,000 and you say the $11,180,000, did I get that right?

Alisa Shin: Right, yes.

Talli Sperry: When you say that, that’s per person, not per couple, right?

Alisa Shin: That’s correct.

Talli Sperry: Okay, so that’s an important clarification.

Alisa Shin: Right, right. So between the two, a married couple, they can now give over $22,000,000 free of federal estate tax to their beneficiaries.

Talli Sperry: And I would guess that’s probably exciting for some of our clients and concerning for others, is that correct?

Alisa Shin: Absolutely. Yes, absolutely. And the other thing, just really important to note, is that when clients give that annual exclusion gift, that $15,000 gift, that does not impact their

$11,180,000 exemption. So you can give $15,000 every year to any number of individuals, and you still have your full $11,180,000 exemption.

Talli Sperry: So that can be very helpful.

Alisa Shin: It can be very helpful, yes.

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