It’s time to revisit your family legacy plan. The new tax reform legislation (Tax Act) creates a window of opportunity for wealth transfer planning by successful families until 2026. 

Doubling Transfer Tax Exemptions.  As of January 1, 2018, the Tax Act doubles the “basic exclusion amount” for the gift, estate, and GST taxes (transfer taxes) from $5 million to $10 million, as annually adjusted for inflation to determine the available exemptions in each year. The last time we had transfer tax relief, the gift tax exemption was capped at $1 million, but not this time -- the flood gates are open.

In 2018, the available transfer tax exemptions should equal $11.2 million ($22.4 million per married couple). 

By 2025, these exemptions may equal almost $16.8 million (at a 1.5% annual inflation rate).

2026 Sunset.  The Tax Act terminates the doubled basic exclusion amount on January 1, 2026, reverting back to $5 million (inflation-adjusted to 2026) assuming no interim changes by later administrations.

In 2026, the available transfer tax exemptions could plummet to roughly $6.3 million (at a 1.5% annual inflation rate).

Smaller Exemption Increases. The Tax Act now requires use of a “chained” index to make inflation adjustments to the basic exclusion amount, which will generally produce smaller annual inflationary adjustments after 2017.  This change does not sunset.   

Status Quo Otherwise.  All other transfer tax provisions and rates remain the same, including a step-up in income tax basis to the fair market value of assets at an individual’s passing and estate tax exemption portability between spouses.

Don’t Overly Fear Clawback. A “clawback” can produce greater estate tax liability when lifetime gifts are made using a higher unified gift/estate tax exemption, but the donor later passes when that exemption has decreased. The Tax Act appears to give the IRS authority to address this issue, so families should not overly fear using their full lifetime gift tax exemptions before 2026.

Brave New World - Planning Opportunities.  For successful families, the Tax Act provides exceptional opportunities for substantial wealth transfer planning:

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