The Tax Cuts and Jobs Act (TCJA) reduces individual and corporate tax rates, eliminates a bevy of deductions and makes a host of changes to how Americans can preserve their wealth.
Q: What effect will the TCJA have?
A: Although the act falls short of repealing the death tax, it doubles the amount an individual may transfer tax free, either in his or her lifetime or at death.
Q: When is the TCJA efective?
A: Effective January 1, 2018 (and expiring December 31, 2025),
Q: What are some specifics of the TCJA?
A: The combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption amounts double from an inflation-adjusted $5 million to $10 million. Taking into account inflationary adjustments, the actual amount for these exemptions is expected to be $11.2 million for an individual or $22.4 million for a married couple in 2018. Both exemptions will continue to increase with inflation. Both will also revert back to their current levels at the start of 2026. (Congress could also lower the exemptions before then.)
Q: What are some opportunities individuals have with these increases?
A: The higher exemptions may shield many families from estate taxes entirely, allowing them to simplify their planning strategies. Individuals who have already made gifts using the full lifetime exemption now have an opportunity to make additional gifts. Individuals may want to take advantage of the increased GST exemption to create GST-exempt trusts. Those with existing trusts subject to the GST tax may want to consider early distributions. It makes sense to review old life insurance trusts intended to pay an estate tax, and determine if the plan still makes sense or if it should be modified for other asset protection. If you don*t want to adjust your gifts now, consider updating your durable powers of attorney to include a gift provision. If you became incapacitated, that would allow your agent to leverage the new exemptions.
Q: What are some estate planning factors that can have some influence on these changes?
A: Dated formulas: Estate plans should be reviewed immediately if trusts are funded using a formula linked to the estate tax or GST exemptions. For someone who dies before 2026, these trusts may be funded more than intended, to the detriment of the surviving spouse.
Q: How can state law have some effect on these changes?
A; There*s a growing difference between the federal tax exemptions and similar exemptions afforded under the laws of 15 states and the District of Columbia. It*s unknown how states will respond to the tax changes, so existing estate planning strategies may still be relevant.
Q: Are there any other special situations that should be taken into consideration?
A: Don*t get complacent and ignore estate planning because of the higher exemptions. Estate planning isn*t just about taxes. You want a plan that*s flexible enough to protect surviving spouses, minor children and special needs beneficiaries. Other planning nuances may include profligate beneficiaries, asset protection from beneficiaries* creditors or ex-spouses, family business succession, and more.
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