Applicable Federal Rates - December 2017

2018 Inflation Adjustments to Transfer Tax Items

The IRS released its 2018 tax adjustments - the following table summarizes the transfer tax adjustments. Note that some of these adjustments will become moot if the changes in the House and Senate versions of the pending tax act become law.

DESCRIPTION	2018 AMOUNT	2017 AMOUNT
Unified estate and gift tax exclusion	$5,600,000	$5,490,000
GST exemption	$5,600,000	$5,490,000
Annual gift tax exclusion	$15,000	$14,000
Annual gift tax exclusion for gifts to noncitizen spouses	$152,000	$149,000
Limit on special use valuation reduction	$1,140,000	$1,120,000
2% interest rate portion on deferred estate taxes	$1,520,000	$1,490,000
Foreign gift reporting threshold (gifts from foreign corporations and foreign partnerships)  [$100,000 exclusion for gifts from nonresident aliens and foreign estates is not adjusted for inflation]	$16,111	$15,797

Possible Favorable Impacts on Inbound U.S. Real Property Investments under the Proposed Tax Act

The proposed Act has provisions that will provide benefits to non-U.S. persons making investments into U.S. real property.

For foreign persons investing individually (or through pass-through entities) in U.S. partnership and LLC structures, the reduced maximum tax rate to 25% on pass-through entity income may act to reduce income tax on non-capital gains. Generally, 30% of the profits of such ventures will be able to obtain that rate. Also, if estate taxes are repealed after six years, a major disincentive to foreign individuals in investing through U.S. pass-through entities will fall by the wayside.

For foreign persons that hold their investments through U.S. corporate blocker entities, the reduced maximum corporate tax rate should reduce the income tax cost for such structures.

It remains to be seen what the final bill will look like, and whether it will be passed by Congress. If passes with the above benefits, the foregoing benefits may help offset some of the disincentive to investing in new single family home construction. Such homes may lose various tax incentives, such as limits on interest deductions for a primary residence, the disallowance of interest deductions on second homes, and the narrowing of the gain exclusion on sale of principal residences.

A Pleasant Surprise

Many commentators expected that the new tax bill would pair the repeal of basis step-up at death with the repeal of the estate tax. They were pleasantly surprised to see that basis step-up at death remains unaltered under the bill released last week.

If the bill is passed without changes to these provisions, then planning will focus on maximizing basis step-up at death, perhaps with additional lifetime gift planning in anticipation of a reasonably likely future return of the estate tax in the future when political tides shift. This planning will apply immediately to those whose estates are under the increased unified credit equivalent amounts (these amounts will double in 2018), and then to larger estates once repeal of the estate tax becomes effective in six years.

Of course, repeal may never happen, even if the bill becomes law. We have been down this road before, with the 10 year wait for repeal under the Bush tax cuts. When that 10 year period expired and the dust settled on Congress, we were left with only one year of repeal and then a reinstated estate tax (albeit with increased unified credit exemptions and a reduction in rate).