How Might Tax Reform Affect Your Estate Plan?

Published by Mark Ring

When it comes to finances, it doesn’t take much to create a domino effect. For example, an increase in the fees in your investment account could result in you not meeting your financial goals. This is even more true with far-reaching changes, such as the recent Tax Cuts and Jobs Act. On the surface, we know that Trump’s tax reform bill lowers tax rates for individuals and corporations, increases the child tax credit, doubles the standard deduction, and caps or eliminates several deductions. But does it have any cascading effects on your estate plan?

The act and tax bill are still new, so it’s difficult to predict with certainty what will happen. But the changes do shed light on how estate planning may be affected going forward. Let’s take a look at current law, the notable changes, and what they could mean for you.

Estate Planning Law Before The Changes

If you’ve done any amount of estate planning, you know that taxes are an extremely important factor to take into consideration when creating a strategy. Here’s an overview of the estate tax rules prior to the new tax bill:

Estate Tax: The property in your estate is taxed before being passed on to your beneficiaries. There are various tax rates for this, extending up to 40%.

Gift Tax: When you give some of your assets as a gift while you are still alive, that is also subject to tax, up to 40%. However, you don’t have to pay any taxes on the first $15,000 you give each year. That exclusion applies individually to each person you give to.

Generation-Skipping Tax: Property transferred beyond one generation by bequest or gift is also taxed. There is an additional generation-skipping tax with, again, a top rate of 40%.

Basic Exclusion Amount: Any of these three taxes, or any combination of the three, does not apply to the first $5 million of transferred property. This exemption, called the basic exclusion amount, is indexed for inflation, so it is actually $5.6 million for 2018.

These taxes do not apply to transfers between spouses. Also, if you die without using up the entire exclusion amount, your spouse can increase their exclusion amount by whatever you had left of your exclusion. That makes the maximum exclusion possible for 2018 $11.2 million.

Tax Basis: If you give someone an asset while you are still alive, they will take on your tax basis in that property, called a carryover basis. However, if you wait until your death to transfer the asset, their tax basis will be the fair market value of the property at the time of your death, called a step-up in basis.

Estate Planning Law Now

And now for a look at what the tax bill has changed:

Basic Exclusion Amount: The legislation doubles the basic exclusion amount. Depending on how inflation is calculated, this would amount to around $11 million per individual or $22 million per couple. This basic exclusion amount would apply to tax years after 2017.

Estate, Gift, And Generation-Skipping Transfer Taxes: The bill will double the estate and gift tax exemption for estates of decedents dying and gifts made after Dec. 31, 2017. The basic exclusion amount would increase from $5 million to $10 million and would be indexed for inflation. After 2023, both of these taxes would be repealed. Beneficiaries would still enjoy a step-up in basis for their inherited property.

Gift Tax: The gift tax would remain, but with a top rate of 35%. There would still be an overall lifetime basic exclusion amount as mentioned above, twice the current amount. The annual exclusion would remain the same at $15,000, though it would increase with inflation.

Are The Changes Permanent?

Under the current law, only 0.02% of taxpayers pay federal estate taxes, so these changes do not affect a broad section of the population, but rather a few of the wealthiest Americans. (1)

Because of this, there is a chance that a future administration could repeal it or the taxes could be re-adopted at a later date. This is important to keep in mind when making plans based on these changes in the law.

What This Means For Your Estate Plan

How will these changes affect you? What does this mean for your estate planning strategies? First of all, the doubling of the exemption amount means that you can increase your giving. It gives you more freedom to be generous as well as the opportunity to remove more from your estate in case the taxes are reenacted later on.

This might be a good opportunity for you to transfer assets from a non-exempt trust to a generation-skipping trust to take advantage of the increased generation-skipping amount. The changes may also affect how you handle distributions from qualified domestic trusts, as they wouldn’t be taxable after 2024.

Next Steps

If your head is spinning from the details, remember that the changes to the tax law will likely affect different kinds of trusts and estate plans in different ways. As always, tax law is complicated and you should always work with an experienced financial professional for your estate planning needs.

Since this could only be a temporary reprieve, it is important to take advantage of the benefits quickly. At Jacob William Advisory, we provide our clients with a Wealth Enhancement Team consisting of attorneys, CPAs, and CFPs® to handle even the most complex estates. If you want to work with a team you trust to take care of those you love, schedule a complimentary consultation by contacting us at 410-821-6724 or [email protected].

About Mark

Mark Ring is the co-founder and Managing Partner of Jacob William Advisory, a wealth management firm whose sole mission is to service their clients’ needs beyond their expectations. Mark has over 30 years of industry experience and for the past decade, he has been committed to building Jacob William Advisory into one of the foremost wealth advisory firms. Mark graduated from the University of Maryland with a Bachelor of Science in Economics and spends his time outside of the office with his wife, Nancy, and his two wonderful children. He gives his time to numerous nonprofit organizations related to education and the arts, often serving as a board member. He enjoys playing tennis, golf, bicycling, cooking, and traveling. Learn more about Mark by connecting with him on LinkedIn.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor.



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