Estate planning: Finding opportunity in the new law
Included among the provisions of The Tax and Job Cuts Act of 2017 are new estate, gift, and generation skipping transfer tax exemption amounts, increasing the amount individuals may transfer to heirs free of transfer tax. For 2018, the exemption amount will be $11,180,000 per individual, compared with an exemption amount of $5,600,000 per individual under the previous law. This amount may be transferred to heirs either during one’s lifetime or upon passing.
What should you do now to take advantage of this new opportunity for you and your family?
First things first: Review your documents
Estate planning documents are typically drafted with formulas that are tied to the estate or generation skipping transfer tax (GST) exemptions that are in place at the time of one’s death. These formula provisions can produce significantly different results in an environment where the exemption is $11.18 million vs. $5.6 million. It’s important to review how your formula clauses impact your spouse and other beneficiaries upon the first to die and second to die, especially if yours is a blended family. Consider:
If your estate plan is set up to leave money to charity based on reducing your estate tax liability, you should review your documents to ensure they reflect your wishes in the current climate.
If your estate plan leaves the exemption amount to your children with the remainder to the surviving spouse, your documents should be reviewed to ensure there are sufficient assets available for the surviving spouse under the new exemption amount.
If your estate plan provides for GST exempt and non-exempt trusts for your children and grandchildren, you should review your documents to ensure that the GST Exempt trusts are not being overfunded relative to what you intended.
It’s important to keep in mind that the changes to the exemption amounts only apply through Dec. 31, 2025, after which the exemptions will return to the pre-Act level. Therefore, you’ll need to evaluate the costs of having your estate plan revised against your particular facts and circumstances, including health concerns and family dynamics. At a bare minimum, you should make sure that your crisis plan is in proper order and that you have wills, revocable living trusts, and financial and healthcare powers of attorney.
Take this opportunity to review your estate plans and succession plans for your businesses with your professional advisory team.
Although we don’t know for certain whether the new estate tax law will actually sunset in 2026 or if it will be modified by a future administration, we do know that the current climate affords a variety of planning opportunities:
Individuals who are open to lifetime gifting and are financially independent may want to do so now that there’s additional exemption available.
Those who are looking to transition their closely-held businesses may have additional options available for transfers of ownership due to the increased exemption amounts.
Families who are no longer subject to an estate tax because of the increased exemption amount may want to consider shifting focus to income tax planning by employing techniques to maximize the step up in cost basis afforded to assets held in the estate at one’s death.
Those who have put life insurance in place for estate tax liquidity should review those policies in light of the new tax regime to determine if the economics of the policy justify its retention or if there are more favorable options available.
Regardless of the current changes to the transfer tax system and the future of the estate tax, sound estate planning is critical for you and your family. Take this opportunity to review your estate plans and succession plans for your businesses with your professional advisory team. Those with a solid plan in place are better positioned to more easily determine the best course of action in the event of any legislative change.
If you have questions, please give me a call.