Does The Trump Tax Law Affect My Estate Plan?
By Colin B. May, Esquire
Estate Planning Attorney
In life, we can only be certain of three things: eventually passing away, paying taxes, and the assurance of constant change. In no place is this lesson more apparent that the ever-changing landscape of our tax code. If you’ve kept up to date with the news, you have certainly heard that big changes are in store beginning as early as this year!
First of all, what does the new tax law do?
The Tax Cuts and Jobs Act of 2017 or “TCJA”, is unquestionably the most sweeping tax legislation in the last 30 years and amends the Internal Revenue Code of 1986. The final version of the bill, passed by Republican Party line vote through Congress, was signed by President Trump into law on December 22, 2017. Among other things, the law modifies the current tax brackets for individual income taxes, doubles the standard deduction while limiting personal itemized deductions, increases the estate tax exemption, creates new deductions for pass-through entities such as partnerships and LLCs, and reduces rates for corporations.
Though it was expected that the bill would place new restrictions on qualified retirement account transfers and place new caps on contribution limits this fortunately did not come to pass. For a general discussion of these concepts as they should have a place in your estate plan, see our article on Retirement Account Beneficiaries: How the Tax Rules Change.
Changes to the Federal Estate Tax
As an estate planning attorney, there is no better place to start the discussion than to address the federal estate tax, or “death tax.” Though it was clear that with a Republican majority in both houses of Congress something would be done to limit the estate tax, there was much discussion about whether this would come in the form of a complete repeal of the tax or simply an increase in the federal tax exemption amount. Currently, estates with a total value below a specified limit – known as the federal estate tax exemption – are not required to pay this tax. Amounts which exceed the exemption amount are subject to a hefty 40% tax.
Even though Congress ultimately decided to increase the amount of the exemption, the difference between an outright repeal and increase in the limit is actually quite insignificant for most people.
In 2017, estates valued under $5.49 million, or $10.98 million for married couples, were exempt from paying federal estate tax. At that rate in 2017, 99.8% of all estates in the United States would have been exempt from paying the tax. The final version of the new law doubles this exclusion to roughly $11.2 million for individuals and $22.4 million for married couples filing jointly. This effectively means that less than 0.02% of estates will ever have to pay this tax.
What if my estate falls within in the top 0.02%?
If you had previously planned on passing on an estate that might be in excess of the federal exemption at the time of your death but now fall safely below the threshold, it may be time to revisit your estate plan.
Let’s imagine that a married couple – let’s call them John and Judy Smith – has $15 million in combined assets. Under the previous law, the amount of their estate in excess of $10.98 million would be subject to the 40% rate. If both John and Judy died in 2017 with $15 million in assets, the exposed $4,020,000 ($15 million minus the exemption of $10.98 million) would result in a tax bill of $1,608,000 (40% of $4,020,000). But, let’s assume the Smiths are alive and well in 2018 but have prepared a plan that maximizes the $10.98 million exemption and spends down the excess amount to minimize estate tax. This would have been a prudent approach while the exemption was $10.98 million, but the money that is no longer exposed to the tax may have a more efficient role in the overall plan.
For a couple in this situation, it may well be time to consider how their current plan accommodates this change. A quality plan, including any plans we have prepared for our own clients, will likely have the built in flexibility to adjust to this new limit, but a quick discussion with your estate attorney never hurts.
Planning for the 99.8%
Now, if you fit into the overwhelming majority, you didn’t have a federal estate tax problem if you passed away in 2017 and you won’t have one if you happen to pass away in 2018. This should alleviate some of your concern, but keep in mind that federal estate tax is only a small piece of the larger tax puzzle that is your estate. In addition to the non-tax functions of an estate plan such as asset protection and efficient administration, your plan should also address how assets will be taxed during your life and in the hands of your loved after your death. These tax-planning considerations take on a new significance as the new tax law shifts the focus away from federal estate tax and places greater emphasis on the side of business and individual taxation.
Now that crossing the federal tax threshold is a remote possibility for most people, we have greater flexibility to plan in a way that protects our assets from creditors, divorces, and maximizes income tax and capital gains tax efficiency. If you have a plan with us, it is likely that this flexibility is already incorporated into your plan as we are always cognizant of changes in the law. For those of us without a plan, or without a current plan, now may be one of the greatest opportunities to think about your estate plan.