How the new tax law affects estate planning

Clara Brown Shaffer
Clara Brown Shaffer

With the Tax Cuts and Jobs Act (TCJA) fresh off the presses,  there are 10 important points to remember about the legislation as it relates to your estate planning.

The good news is the TCJA increases the estate tax exemption from the 2017 level of $5,490,000 per person to $11,180,000. For a married couple, this means they can pass $22,366,000. The bad news is the increased exemptions are scheduled to expire at the end of 2025. Unless you’re in your 80s, you should assume the higher exemptions will expire.

If you have a large estate — perhaps defined as one worth more than $5,490,000 for an individual and double that amount for a married couple — you might want to consider making gifts now to remove some of your estate from being taxed after Dec. 31, 2025. Making current gifts removes the appreciation on those assets out of your estate.

Married couples should consider how portability — that is,  transferring the exclusion of the first to die to the surviving spouse for his or her use when he or she dies — fits into their estate plan. To port the exclusion to a surviving spouse, a federal estate tax return must be filed when the first spouse dies.

Make sure your estate plan is consistent with the change in the law. Have the plan reviewed by an estate planning attorney versed in the new law and the opportunities it presents.

The future remains murky. The U.S. House of Representatives wanted full repeal of the estate tax. Because the Senate required 60 votes to get full repeal and Republicans could barely come up with more than 50, the repeal didn’t occur. It’s possible, although it appears unlikely, full repeal could still occur between now and 2025.

In our opinion, there was ongoing discussion to eliminate three key tax provisions that would have hurt main street individuals. First, there was discussion about disallowing a basis adjustment at death. Currently, when a person dies, the heir gets an inherited asset with a new basis equal to the date of death value. Second, there was speculation the exclusion of the gain on the sale of a residence was going to be eliminated. Third, there was the possibility withdrawals from inherited IRAs wouldn’t be allowed to be stretched over the lifetime of beneficiaries, but instead would have to be withdrawn within five years of the account owner’s date of death. None of these changes were implemented.

Income tax planning is the new estate tax planning. All taxpayers should pay particular attention to the effects of income taxes on their finances and net worth. Estate taxes might not be an issue, but income taxes certainly are.

Owners of small businesses should pay particular attention to the choice of their entities. Should they operation a  C corporation to have income taxed at 21 percent? What about using a Subchapter S corporation? How does the new tax code apply to pass-through income? 

Some things just don’t change. Even with higher exclusion amounts, it’s still crucial to review each estate plan to insure it meets the goals of the individual planning the estate. Second marriages, heirs with creditors or disabilities or heirs would could get divorced all must be considered even if there’s no estate tax.

Change is inevitable, so just get used to it and expect it. Whether we like it or not, there will be more changes in estate planning.