How the New Tax Law Affects Estate Taxes and Estate Planning


Some are calling the tax law passed in December 2017 the most sweeping tax reform since 1986. And while the proposed repeal of the estate tax didn’t come to fruition, plenty of changes did—including new guidelines for estate taxes. Here’s how the latest tax bill could affect your estate planning.

Limits rise (a lot!)

First and foremost, the federal estate, gifting, and generation-skipping tax exemption has been doubled. So while in 2017 the exemption rate was $5.49 million or higher, the latest tax bill bumps that total up to $10 million per person or $20 million per married couple. And because that number is tied to inflation, projections estimate that the exemption will actually total $11.2 million by the end of 2018.

That means if you die in 2018, as long as your estate is worth less than $11.2 million, you can pass it on along without worrying about taxes. In the past, only two out of every 1,000 estates were made to pay a federal estate tax, according to the Joint Committee on Taxation. With the latest tax bill that number will decrease even further: An estimated 1,800 estates would owe estate tax in 2018, down from 5,000 under 2017 rules.

Timing matters

The bill covers the years 2018-2025, meaning it won’t affect your 2017 filings. And if it isn’t renewed by Congress in 2025, the exemption rate will go back to the 2017 rate (plus inflation). That’s added some uncertainty for those who are affected by these changes.

One reason is that over your lifetime, you’re allowed to give away money up to the amount of the estate tax exemption without paying any taxes on those gifts. (Whatever you gift is then subtracted from your estate tax exemption; so if you gave away $3 million during your lifetime and then died in 2017, your federal estate tax exemption would be reduced to $2.49 million.) In the past, you could give away $5.49 million in your lifetime; under the new rule, the lifetime limit will essentially double.

Keep in mind that these gifts don’t have to be made outright in cash—the money could also be put in a trust, which passes on to your heirs after your death or at some time you decide in the future (such as when a child reaches 21 or graduates college).

So how does this affect your estate planning now? Let’s say you give away $10 million in the next few years—still under the $11.2 million limit. If the exemption limit goes down to $6 million in 2025, timing your gifts to happen before then could be beneficial, Beth Kaufman, an estate lawyer with Caplin & Drysdale in Washington, D.C., recently told Forbes.

But one thing that’s still unclear is whether, if the exemption limit does revert, you could be penalized or taxed for those funds you’ve gifted above the limit, the New York Times notes. That’s why it’s essential to consult an estate planning attorney about whether taking advantage of the increased exemption makes sense for your specific situation.

Consider the federal and local landscape

While the latest tax bill is a federal mandate, the increased exemption under the new federal tax code could have state-level implications as well. That’s because a handful of states have historically tied their estate tax rate to the federal rate. Others have no estate tax or have an exemption rate that isn’t tied to the federal rate. Before you make significant changes to your estate plans, it’s worth checking the exemption rate for your particular state to know for sure whether that’s changed.

So what do all of these changes mean for your overall estate planning strategy? If you think you’ll be affected, you’ll want to review your existing estate plans. Schedule a meeting with your estate attorney to take sure you’re taking full advantage of the new codes. There’s still much uncertainty about how this tax code may hold up over time, so expert assistance is essential.

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