2018 Estate Tax Law Changes

Drastic Changes In Exemption Amounts: Our nation’s estate and gift tax laws changed drastically in 2018. This change significantly increased estate and gift tax exemptions. As a result of this change, most decedents’ estates may never incur estate taxes. However, these increased exemptions also harbor adverse consequences for many taxpayers. Taxpayers who have estate plans designed around traditional A/B (taxable/non-taxable) trusts will need to review their estate plans.

History of Exemptions: In 1996 the estate tax credit was only $600,000. In 2002 it increased to $1 million. In 2010 it jumped to $5,000,000. In 2018, the exemption was increased to over $11,000,000 for individuals and over $22,000,000 for couples.

Potential Problems With Increased Exemptions: Before this major increase, many families chose to put their post-death assets into A/B (taxable/non-taxable) trusts to shield their assets from federal estate taxes. Unfortunately, these same increased exemptions can now render those estate plans obsolete. Unless these older A/B trusts are updated, many existing estate plans could create unnecessary post-death trust administrations and increased administration costs. Even worse, they can cause a sizable portion of a decedent’s assets to be allocated to a bypass trust that disinherits their surviving spouse.

Another negative consequence of this new estate tax law will be the inability of assets allocated to a bypass trust to receive a stepped-up basis for future capital gains tax purposes. Because of the potential problems associated with this law, married couples (especially those in second marriages and blended families) should undertake a comprehensive review of their estate plan documents.

Exemptions Tied to Inflation: The exemptions provided in the 2018 tax law have increased over the years because of the inflation adjustments built into the law. As of 2022, the exemption amount is $12,060,000 for individuals and $24,120,000 for couples. The top tax rate has remained steady at 40%.

Note: Exemptions will revert to their 2017 levels in 2006 unless action is taken by Congress.