There’s a Little Surprise in the New Tax Law: A Gift Tax Trap

With the increases in the estate tax exclusion, far fewer Americans will need to pay the federal estate tax.  However, there’s something else to be aware of.

As of January 1, 2018, when the new tax law went into effect, the estate tax exclusion got a bump up to an almost stratospheric number. As reported in Market Watch’s recent article, “Watch out for the gift tax trap in the new tax law,” a single person could have as much as $11.2 million in assets and not pay a penny in estate tax.  That amount is doubled for married couples, if they are savvy enough to make a properly-timed portability election after the first spouse dies.

However, failing to pay attention to the new details in the law can lead to misapplication of the changes.  This could result in significant tax consequences for the beneficiaries of the estate, as it relates to gifting.

The new law leaves in place the rule that says when a person dies, the cost basis of the assets (not including IRAs and retirement plans) would be increased to the value of the asset at the date of the owner’s death. That’s a step up in basis. As a result, the capital gain or profit created in the assets over time is wiped out at the owner’s death.

Remember, the asset only qualifies for gain forgiveness—and the new cost basis—if the owner still owns the asset at his or her death.

It can’t be gifted during the life of the owner or there’s no benefit of step up in basis at the death of the person who previously made the gift.

Speak with an estate planning attorney who has done their homework on the new tax law and understands the interplay between gifting and other estate planning strategies under the new tax law. They will be able to help you to take advantage of the new law, to benefit your estate and your heirs.

Reference: MarketWatch (February 1, 2018) “Watch out for the gift tax trap in the new tax law.”