Following President Trump’s signing of the Federal tax bill on 22 December 2017, the effective lifetime Estate and Gift Tax exemption for US citizens & residents (domiciled) has increased from $5.49m in 2017 to approximately $11.2m per individual (approaching $22.4m for US citizen or US domiciled married couples) with effect from 1 January 2018. The inflation adjustment factor has not yet been finalised.
President Trump’s stated goal was to have Estate tax repealed completely. While he was unsuccessful in this, the new exemption increase is due to "sunset" in 2026, when the previous exemption amount ($5m indexed annually for inflation) will return, unless there is further legislative change.
The top rate of Estate Tax remains at 40%.
For 2018, the annual Gift Tax free allowance has increased with inflation to $15,000. This allowance is increased to $152,000 for gifts to a non-US citizen spouse.
The Estate Tax exemption for non-US persons holding US situs taxable assets remains at $60,000. This is subject to adjustment through use of available tax treaties but further advice should be taken to ensure that the ownership of US assets is handled in a tax efficient fashion.
Although this substantial increase in the Estate and Gift Tax exemption will allow for further planning, and in many cases remove the exposure to these taxes, it is important to not disregard the need to plan.
For UK residents, any planning will of course need to consider the impact of UK inheritance tax, where the exemptions are far smaller than in the US. However, the Potentially Exempt Transfer rules, which allow a gift to be UK IHT free if the donor survives seven years post the gift, should allow for an effective strategy for lifetime gifting, along with other planning opportunities that may be relevant.
Those of you coming up to "deemed" UK domicile status (resident in the UK for 15 of the last 20 years) could also consider the benefits of an excluded property trust. This can offer significant UK inheritance savings through the protection of assets from any current or future IHT charges
The non-tax reasons for planning for the next generation, and controlling the intended destination of your assets, remain relevant. Effective wills to cover such issues as the naming of guardians for minor children, and appointing executors or determining who should be appointed power of attorney in the event of incapacity still require careful attention.
If wills or related planning have previously been put in place, this should be reviewed to ensure it is still fit for purpose. If there is no will or planning in place, we would certainly advise that this be addressed as a matter of urgency.
Although a little late now, this can still be considered a very worthwhile New Year’s resolution!!
Frank Hirth are unable to provide legal services but would be very happy to introduce you to appropriate advisors.
One final point: the potential trap of state level taxation should also be considered. Federal changes are not always adopted in in a consistent manner by individual states. For example, the New York state level Estate Tax exemption remains linked to the pre 2018 exemption.
If you have assets in the US, state level taxation must be considered when reviewing the overall position.
We would be delighted to discuss these issues with you further.
Iain Younger, Frank Hirth