Ronald Fatoullah & Associates - Elder Law

Applying the Treasury's New Inflation Adjustments

Applying-the-Treasury's-New-Inflation-Adjustments-DPLIC-125186884-270x179.jpgBy Ronald A. Fatoullah, Esq. and Debby Rosenfeld, Esq.

{3:44 minutes to read} Prior to the new tax law, the Federal exclusion amount for estate taxes was $5 million adjusted for inflation from the year 2011. The exclusion amount is the amount that individuals can pass to their family and loved ones without the imposition of Federal estate and gift taxes. In its annual Revenue Procedures, the Department of the Treasury issues inflation adjustment figures each year.

With the inflation adjustment, the Federal exclusion amount would have been $5.6 million as of January 1, 2018. The new tax law effectively doubled the exclusion amount. Ordinarily, based on the Treasury Department's standard calculations, the exclusion amount would have risen to $11.2 million. However, the new tax law also amended how the inflation amount is calculated. Due to the new adjustment, the actual exclusion amount as of January 1, 2018, is $11.18 million.

Clearly, the increase in the exclusion amount is very significant and offers an opportunity for serious and broad estate tax planning. But this doubled exclusion is only temporary and will expire at the end of 2025. At such time, it will presumably revert back to the original $5 million, adjusted for inflation.

A common question is whether the exclusion should be utilized by taxpayers if it is merely temporary in nature. If, for example, someone gifts $10 million in property to his children this year, but passes away in 2027, when the exemption has reverted back to what it would have been without the new tax law, will his estate be subject to taxation? An estate tax return is prepared after a person dies and includes any taxable gifts made during such person's lifetime. In this example, if the exclusion has reverted back to $5 million plus the inflation adjustment, can the fact that the gift was made at a time when the exemption was $11.2 million apply, thereby eliminating any estate/gift taxes? The answer seems to be that the exclusion at the time the gift was made will apply. Section 2001(g) of the Internal Revenue Code of 1986, as amended, ostensibly considers the time the gift was made in applying the exclusion. The section directs the Treasury to release regulations clarifying this provision. Such regulations have not yet been issued. Thus, the answer is not 100% clear.

Based on the above, for those with an estate that exceeds $5.6 million, it would seem sensible to engage in current gifting to utilize this temporary exclusion. Even if the excess gift does get included in the individual's estate when he dies, it will still have been prudent to make the gift. In such case, the appreciated value (after the time of the gift) will escape estate taxation.

While the exclusion amount of $11.18 million is transitory, there is a myriad of estate and income tax planning that can be implemented at this time. One should also note the relatively low New York State estate tax exclusion (currently $5.25 million) and the fact that New York does not impose a gift tax, thus making the gift planning all the more important. It is always advisable to seek the counsel of a professional who can offer a plan that is custom tailored to one's specific estate.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Debby Rosenfeld, Esq. is a senior staff attorney at the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Advice Period, a wealth management firm, and he can be reached at 424-256-7273.

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