Federal Tax Reform May Affect Estate Planning

November 13, 2017

On November 2, the House Ways and Means Committee released a draft tax reform bill known as the Tax Cuts and Jobs Act. The Senate Finance Committee followed on November 9 with its own outline for tax reform legislation. Both proposals contemplate significant changes to the gift, estate, and generation-skipping transfer (GST) tax laws. It is unclear how the two proposals will be reconciled, and if and when final legislation will be introduced. We have summarized below certain of the key provisions of these two proposals:

Current law. As you may know, under current law, U.S. federal gift and estate taxes may apply at a rate of up to 40%. Each individual who is a citizen or resident of the U.S. is allowed a $5.49 million lifetime exclusion amount, which may be used to shelter transfers made during life or at death from gift and estate taxes. That exclusion amount is indexed for inflation and is scheduled under current law to increase to $5.6 million on January 1, 2018. In certain cases, a surviving spouse may use a deceased spouse’s unused exclusion amount. While transfers between spouses generally are not taxable, a transfer at death to a noncitizen surviving spouse will be taxed unless it is made to a special “qualified domestic trust”.

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