Client Update September 2019
As we begin to enter the brisk days of fall, we wanted to provide you with a summary of recent estate and gift tax developments. While many are aware of the Tax Cuts and Jobs Act (the “TCJA”) that was signed into law in December 2017, there have also been other significant developments that we want to highlight for you.
FEDERAL ESTATE AND GIFT TAX
Temporary Increase in Personal Gift and Estate Tax Exemption
The TCJA temporarily doubled the personal gift and estate tax exemption amount from 2017 levels, beginning in 2018. This increased exemption will be adjusted annually to account for inflation until January 1, 2026, when it is scheduled to sunset and return to 2017 levels as adjusted for inflation. For 2019, the exemption amount is $11.4 million.
As a result, fewer estates will be subject to the federal estate tax during this time period. In addition, the TCJA continues to allow a surviving spouse to save a deceased spouse’s unused federal estate and gift tax exemption for use at the survivor’s later death, meaning that the personal exemption can be as much as $22.8 million for a surviving spouse.
No “Clawback” on Gifts Made During Increased Exemption Period
One of the big questions arising after passage of the TCJA was how it would impact individuals who make gifts during the increased exemption period, if and when the exemption goes back down in 2026. The IRS recently issued proposed regulations stating that there will be no “clawback” of gifts made during the increased exemption period after it expires. As a result, gifts that were exempt from gift tax because of the increased exemption in the TCJA will not be taxed at a later date when the increased exemption sunsets. This addresses the concerns of people who would like to make gifts now, but fear that it would subject their future estate to increased estate taxes if they die after 2025. Although these regulations must still be finalized, they should provide relief to individuals who would like to take advantage of the increased exemption by making gifts now.
Annual Gift Tax Exclusion Remains the Same in 2019
The annual gift tax exclusion, which is periodically adjusted for inflation, is $15,000 in 2019. An individual may gift up to $15,000 per person (or $30,000 if married) this year without triggering a gift tax or using up a portion of his or her personal exemption. Note that married couples who make joint gifts may still need to file a Gift Tax Return, even if no tax is due.
CONNECTICUT ESTATE TAX AND PLANNING
Increase in Connecticut Estate and Gift Tax Exemption for 2019
Connecticut also made changes to its estate and gift tax exemptions, introducing graduated increases beginning in 2018. In 2019, the Connecticut estate and gift tax exemption is $3.6 million. The change to Connecticut’s exemptions pre-dated the TCJA and there was uncertainty as to whether Connecticut would match the Federal exemption in effect in 2017 or the current increased Federal exemption. That question has now been clarified in a favorable way and the Connecticut exemption is slated to match the Federal exemption in 2023, with gradual increases each year as follows:
|2023||Not over the Federal exclusion amount|
Increase in Marginal Estate Tax Rates
In addition to increasing the exemption, Connecticut also adjusted the marginal tax rate. Estate tax rates stay the same in 2019 for taxable estates over the exemption amount up to $5.1 million. For estates over $5.1 million, the tax rate increased from 9% to 10%, incrementally increasing up to 12% for taxable estates over $10.1 million.
New “Mansion Tax” To Take Effect in 2020
The new budget recently signed by Governor Ned Lamont includes an increase in the state conveyance tax on sales of houses in excess of $2.5 million beginning July 1, 2020. Currently, the state conveyance tax is .75% on the first $800,000 of the sale price and 1.25% on any portion over $800,000. The new “mansion tax” imposes an additional 1% tax on the portion over $2.5 million beginning July 1, 2020. Sellers who remain Connecticut residents would be eligible for a credit on the increased conveyance tax, which can be taken on state income tax returns over a period of three years, beginning with the third year after the year of the sale. A seller would need to remain in Connecticut for six years in order to fully recoup the “mansion tax.”
Estate Planning Changes
Connecticut made significant changes to its trust laws, which will go into effect on January 1, 2020. This is in addition to the changes Connecticut made to other estate planning documents in recent years. If we have not reviewed your estate plan with you in the past few years, please reach out to us to see if any changes are appropriate.
NEW YORK ESTATE TAX AND PLANNING
Increase in New York Estate Tax Exemption for 2019, but “Cliff” Remains
The New York estate tax exemption amount increased to $5.74 million for decedents dying in 2019. However, estates exceeding the New York exemption by 5% or more ($6,027,000 in 2019) may still be subject to the New York estate tax “cliff” whereby the exemption is lost and the entire estate is subject to estate tax. In addition, the requirement to add back to an estate gifts made during the three-year period preceding the decedent’s death was recently extended for decedents dying after January 15, 2019 and before January 1, 2026.
Supplemental “Mansion Tax” For New York City Properties
New York has a statewide 1% “mansion tax” on sales of homes of $1 million or more. However, effective July 1, 2019, sales of properties in New York City will also be subject to a supplemental mansion tax. Beginning with sales of properties between $2 million and $3 million, there will be an additional .25% tax, resulting in a total mansion tax of 1.25%. The tax gradually increases up to a total mansion tax of 3.9% for sales of properties of $25 million or more.
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It is important to note that the tax landscape is always shifting, so there is the possibility that changes to the TCJA could occur before 2026. It is a good idea to periodically review your estate planning documents, but especially so in light of these recent changes to make sure that your documents maximize the available benefits, as well as address other important issues unrelated to estate taxes.
We look forward to hearing from you.