The Tax Cuts and Jobs Act of 2017 (TCJA) is a significant tax reform measure that impacts all federal tax laws. And instead of repealing federal gift and estate taxes, the new law actually doubles these benefits, essentially cutting the number of estates subject to estate tax by more than half.
For gifts and estates, the exemption in 2019 is $11.4 million for individual estates and $22.8 million for married couples (adjusted annually for inflation). This is causing some people to make the mistake of thinking that they’re off the hook for estate planning. However, the inflated exemptions will revert to their 2017 levels (about $6 million adjusted for inflation) in 2026 - a potential trap for people who don’t plan properly. And, depending on changes in the political mood, there’s always the possibility that the exemption could be changed.
Regardless of tax liability, it’s sensible to plan your estate. If you live in a state that imposes estate taxes, many tax-reduction strategies still apply. There are also numerous non-tax issues that still need to be considered, like generational planning, asset protection, guardianship arrangements and planning for family members with special needs.
It’s a good idea to plan defensively, preparing for future uncertainty and taking advantage of what the current law has to offer - ‘locking in’ the current exemptions permanently where possible.
Here are some key estate planning considerations to discuss with your tax advisor.
Larger Lifetime Gifts
Increasing your tax-free lifetime gifts helps you to take advantage of the increased exemption amount. You can shield additional wealth along with any future appreciation in value from estate taxes. Even if the exemptions are reduced by the time you die, the larger lifetime gifts will be grandfathered under the current exemption. Because lifetime gifts don’t qualify for a stepped-up model, you’ll need to weigh the potential income tax cost against the potential estate tax savings.
Generational Planning with Dynasty Trusts
Dynasty trusts let you take advantage of historically high exemptions to transfer substantial amounts of wealth to your grandchildren and future generations. This allows your wealth to grow and compound free of federal gift and generation-skipping taxes. In some states, a dynasty trust can last in perpetuity.
By allocating your exemption to Generation-Skipping Trust (GST) contributions, any future distributions of trust assets to future generations will avoid GST taxes, even if your assets grow beyond the current or future exemption amount.
529 College Savings Plans
Under the TCJA, the popular 529 college savings plan becomes more attractive as an estate planning tool. When you contribute to a 529 plan, your contributions are removed from your estate while you retain the right to change the beneficiary or even get your money back. The plan allows you to accelerate up to five years of annual gift tax exclusions into one year, allowing you to gift as much as $75,000 ($15,000 x 5) or $150,000 for a married couple, free of gift or GST taxes. And you would not use any of your exemptions.
Irrevocable Life Insurance Trust
When you purchase life insurance inside an irrevocable life insurance trust (ILIT), the tax-free death benefit proceeds are excluded from your estate and can be used to pay estate taxes and other estate settlement costs. Life insurance purchased this way is one of the most tax-efficient ways to protect your beneficiaries from a sharp increase in estate taxes, resulting from either increased estate tax rates or sharp decreases in the estate tax exemption.
Review Your Estate Plan
The TCJA’s increased estate tax exemptions bring much-needed relief to the estates of high net worth individuals. Don’t become complacent about your estate plan though. This is an ideal time to ensure you are taking full advantage of the new opportunities the law offers and plan defensively for an uncertain future. If you need help reviewing your estate plan in light of the new tax law, click the button below to schedule a free consultation with one of Glass Jacobson’s financial planners.