The Tax Cuts and Jobs Act of 2017 ("Act"), effective as of January 1, 2018, includes significant changes that affect estate planning.
Increased Exemption Amounts
The Act increased the estate, gift and generation skipping tax exemption to approximately $11.2 million for an individual and $22.4 million for a married couple beginning on January 1, 2018.
The increased exemption amounts mean that most Americans do not have to be concerned about paying estate tax. The substantial increases to the estate, gift and generation skipping tax exemptions will sunset (expire) on December 31, 2025.
Beginning January 1, 2026, the exemption amount will revert back to $5.49 million (indexed for inflation) for individuals. Also, there is always the chance the Act could be repealed. It is important to stay up-to-date on tax changes and to plan for uncertainty by building flexibility in to your estate plan.
The Act made no change to tax provisions that allow individuals who inherit property to receive a stepped up basis. When an individual inherits property, they receive a "step up in basis" to the value of the property at the deceased owner's date of death, thus eliminating any potential capital gains tax if the property is later sold.
With the increased exemption amounts, there are opportunities to plan for basis adjustments without creating additional estate tax.
Revisiting Estate Plans
Many estate plans were put in place when the gift and generation skipping tax exemption amount was much lower. A large number of these estate plans use a formula to divide assets of a married couple when the first spouse dies.
Formulas based on the estate tax exemption have also been used to provide for charitable causes. With the significant increase in the estate tax exemption amount, it is advisable to review your estate plan with an experienced estate planning attorney to ensure your plan works as you intend. Also, there may be an opportunity to simplify your estate plan and provide more flexibility to the surviving spouse.
Estate Planning Is About More Than Taxes
The increased exemption amounts leave many individuals wondering why they need an estate plan. Estate planning is now, and has always been, about more than just avoiding estate taxes. A well drafted estate plan can help blended families ensure their children will not be cut out of an inheritance upon the death of a parent.
In addition, estate planning provides a plan for incapacity and avoids a guardianship proceeding; includes instructions for end-of-life care; provides a plan for the distribution of assets to family, friends, pets and charities; and, includes planning for beneficiaries who may be irresponsible with money or who have substance abuse issues.
Proper estate planning is needed for beneficiaries who receive government benefits for special needs. With the increased exemption amounts, families can refocus estate planning goals on the things that matter most to them.
The recent tax changes are a reminder that you should revisit your estate plan regularly to ensure that it still accomplishes your estate planning objectives. The Act also provides many planning opportunities that should be explored with an experienced estate planning attorney.
**The Act also makes many changes to individual and corporate taxes, as well as eliminating many deductions and credits, which we have not discussed in this article. These changes can significantly affect individuals and business owners. You should speak to your Certified Public Account or other tax professional to see how these changes will impact you and your business.
Contact an experienced estate planning attorney at Ball Morse Lowe, PLLC to learn more about the recent tax changes and how they will impact your estate plan.