Estate Tax Changes under the Tax Cuts and Jobs Act

The newly passed tax reform bill includes some significant changes to the estate tax. Here’s what you can expect.

While the Tax Cuts and Jobs Act made sweeping changes to the estate tax limits, in reality, unless you have significant wealth, you won’t be directly impacted. However, the changes are bound to stir strong emotions in those that feel the reforms are a gift to the wealthy. So what’s new?

Increased Limits

Let’s be honest, for a few years now the chances of actually having to deal with estate tax liability have been pretty low, as most Americans don’t have estates valued at anything close to the limits at which liability is imposed. In 2017, for example, every person could shield nearly $5.5 million from estate tax. Frankly, if you were lucky enough to have an estate worth that much, you would have almost certainly done some effective estate planning to limit any liability you could potentially have.

Well, as if that $5.5 million threshold wasn’t high enough, beginning in 2018, individuals can shield a whopping $11 million (give or take a few hundred thousand dollars, since that’s indexed for inflation) from estate tax liability, and that’s only if you’re not married (more on that later). While that amount is set to sunset in 2025 and revert to the measly $5 million amount in place for 2017, the fact remains that the changes won’t have a direct effect of most people.

Increased Annual Exclusion

Each year, every person is able to make as many gifts of up to $14,000 to as many people as they want without being subject to gift tax. That’s called the annual exclusion. The amount is indexed for inflation, so it does rise a bit each year. For example, in 2018, that amount increases to $15,000. The new tax law does not change the annual exclusion.

No Changes to Portability

Portability refers to the concept that married couples can use any unused portion of their spouse’s estate tax exemption. So, for example if a husband dies first and only passes assets worth $3 million upon his death, then the remaining untouched $2 million can be preserved by his wife. So, upon her death, in 2017 she would have been able to pass assets worth $7 million (her $5 million exclusion plus her husband’s unused $2 million). The concept doesn’t change in the new tax law, but the amounts obviously increase. So, beginning in 2018 married couples can pass a whopping $22 million free of estate tax!

Beware of the Sunset

As they say, “all good things must come to an end.” Or, if you have disdain for the new changes, maybe not so good. But, the fact remains that, if Congress does nothing to extend the provisions of the new law, they will revert back to pre-change, 2017 rates in 2025.

What About State Estate Taxes?

As readers know, on this blog, we focus on the effects of laws on midwestern residents, namely those in Illinois, Wisconsin and Minnesota. So how will the new estate tax changes impact them? Well, it’s not all roses, specifically for residents of Minnesota and Illinois, who, as well as paying federal estate taxes if their net worth is above certain thresholds also have to pay a chunk to the state. In Minnesota, residents who die in 2018 will be required to pay estate taxes at a top rate of 16% for any amounts over $2.4 million—a far cry from the federal limit. That threshold does increase to $2.7 million in 2019 and $3 million in 2020. In Illinois, things are a bit better, but residents will still pay estate tax at a top rate of 16% on amounts over $4 million.   

So What Does the Impact Look Like in the Real World?

As is probably apparent, the reality is that the changes to the estate tax under the new tax law won’t have a significant effect on anyone but the most well off Americans, and even then, it won’t matter unless they die prior to 2025. In fact, it is estimated that only around 1,800 estates will be subject to estate tax in 2018 nationwide. So, the real effect is more so along the lines of anger and frustration that a change was even necessary.

Michael F. Brennan is an attorney at The Virtual Attorney™ a virtual law office helping clients in Illinois, Wisconsin, and Minnesota with estate planning and small business legal needs. He can be reached at michael.brennan@mfblegal.com with questions or comments, or check out his website at www.thevirtualattorney.com.


The information contained herein is intended for informational purposes only and is not legal advice, nor is it intended to create an attorney-client relationship. For specific legal advice regarding a specific legal issue please contact me or another attorney for assistance.