Last month, the IRS announced its annual inflation adjustments for a number of tax-related provisions for 2018, including the estate and gift tax limits and annual gift tax exemption. With planned increases for both, those with moderate to high wealth look to gain increased flexibility to avoid US Estate Tax.
Individuals will see increases in three exemptions: (1) the combined US Estate Tax and US Gift Tax lifetime exemption will increase to $5.6 million (up from $5.49 million in 2017); (2) the US Gift Tax annual exemption for gifts between married couples will increase to $152,000 (up from $149,000 in 2017); (3) the US Gift Tax annual exemption for gifts to persons other one’s spouse will increase to $15,000 (up from $14,000 in 2013). Married couples, in turn, will be able to protect up to $11.2 million from US Estate Tax and US Gift Tax and gift $30,000 annually tax free to persons other than themselves.*
Good estate and gift planning is even more paramount in light of the announced increases in order to maximize wealth transfer strategies. Those who continue to plan around US Estate Tax implications on order to avoid the 40% US Estate Tax will continue to optimize the annual US Gift Tax exclusions. The $15,000 annual gift exclusion is not per couple, but rather per individual, therefore, each member of the couple may give a gift to as many individuals as he or she desires. Any gift above the annual exclusion amount will be deducted from the available combined US Estate Tax and US Gift Tax lifetime exemption of $5.6 million. While the former strategy relies on advanced planning, those arriving late to their wealth will likely look various trusts as short term goals to optimize the annual gift exclusion.
We advise our clients, both Canadian and American, to closely follow the progress of the US tax reform bills before the US Congress as they may potentially change both the US Estate Tax regime and the US Gift Tax regime.
* The $11.2 million combined exemption per couple is not automatic. While an unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax, your surviving spouse must elect it on the tax return of the estate of the first spouse to pass. Failing to do so properly could lead to a surprise federal estate tax bill.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.
About the author
Stephen A. Simon is an Associate at Levy Salis LLP, and a member of the Texas Bar and Quebec Foreign Legal Advisor. Mr. Simon’s practice is focused on the settlement of estates in the United States and Canada, US tax law, and US estate planning for both Canadians and Americans living in Canada.