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Changes to the tax code can and often do impact estate planning because one of the major goals for most is to reduce or eliminate the taxable amount of the estate. Passed at the tail end of 2017, the Tax Cuts and Jobs Act (otherwise referenced as the new tax law), is no different and there were some major changes that will no doubt impact estate plans moving forward. What did the Act change, what didn’t it affect, and what should you do to maximize your benefits?

Estate Exemption

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One of the most significant changes under the new tax law are the estate-related exemption amounts. The estate tax exemption—or estate tax exclusion as it’s sometimes referred to—is the figure subtracted from an estate’s gross value for the purpose of calculating federal taxes.

This change is one that all estate planning individuals, especially those classified as middle- to high-net worth, need to be aware of. For tax years 2018 through 2025, the exemption from estate, gift, and generation-skipping taxes was raised from $5.49 million per individuals to an approximated $11.2 million. (The exemption base is indexed, so the base for the 2017 tax year was $5 million; for the 2018 tax year, the base is now $10 million and still indexed for inflation.) This means each individual should be able to shelter over $11 million before any estate, gift, and generation-skipping taxes apply.

If you’re married, this means your estate exemption for tax year 2018 now equals $22.4 million. (Or, you could think of it like each couple now has an additional $11.2 million in assets available to gift or make a testamentary transfer with.)

Important Considerations

Other estate planning related taxes

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None of the estate, gift, or generation-skipping taxes were repealed by the new tax law, and the tax rates for these remains at 40 percent. Just for review: the federal estate tax is applied to the transfer of property at death; the gift tax applies to transfers made while living; and, the generation-skipping transfer tax is applied to transfers of property that skip a generation.

However, these transfer taxes (sometimes referred to as excise taxes) will apply to fewer estates given the major increase to the exemption figures. (The Joint Committee on Taxation estimates the number of taxable estates will drop to 1,800 in 2018, compared with 5,000 estates under the previous tax law.)

Gift tax annual exclusion

Discussing gift tax can be confusing when you consider there is an annual exclusion amount and a lifetime gift tax exemption. Let’s clarify some important points, so you can feel great about gifting to your loved ones!

In the 2018 tax year, the annual gift tax exclusion will be $15,000. This is up from the $14,000 it’s been stuck at for the past half-decade. This annual gift tax exemption is inflation-based, but only raises in increments of $1,000, which is why it took the rate five years to increase.

This means you could gift up to $15,000 to an individual without cutting into the lifetime gift tax exemption. You can give gifts up to that value to multiple individuals. Meaning if you have three adult children and want to gift each of them $15,000 in the 2018 tax year, you could do so and it would be completely exempt from the gift tax. If you’re married (and your spouse consents) you can give a joint gift (otherwise referred to as a split gift) of up to $30,000 per individual in the 2018 tax year.

Let’s say you, as an individual, want to gift a grandchild $20,000. That $20,000 is $5,000 greater than the annual gift tax exclusions and that $5,000 would then be counted toward the lifetime exemption rate (the $11.2 million previously discussed).

Timing

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Because the new exemption rates are only instated (as of right now) through the 2025 tax year, on January 1, 2026 the exemption basis will revert back to where it was for the 2017 tax year—$5 million exemption per individual. (Of course, the actual figure will be larger because it will still be indexed for inflation.) Congress could choose to extend this exemption rate past 2025, but they could also choose not to. There could also be further changes to the tax law after future congressional and the presidential elections.

Basis adjustment

There was no change made to the step-up in basis rules. Meaning, when you pass, assets left to beneficiaries are reset to the fair market value at the date of your death. This is a benefit when it comes to taxes for both the whomever inherits the property and helps simplify taxes because there’s no guesswork as to what the property was worth when the testator (the person who made the estate plan) acquired it.

Actions to Take Today

If/when the exemption amounts are reduced, there will be no “clawback,” allowed, meaning that gifts and transfers made up until 2025 will not be later subjected to taxes. That means if the increased exemption rate could have an impact on your estate and allows you to make gifts increased in quantity or value, time is of the essence. Where to start?

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Research & consult on your options

There are a few different approaches to gift-giving that could be particularly fitting with the tax changes. Look into establishing and funding a new irrevocable trust or gifting to an existing one. Contemplate how gifts could be applied toward life insurance funding or present sales to trusts. For the charitable-minded individual, the higher exemption amount represents an opportunity for increased philanthropy—consider a tool like a charitable lead trust.

Discuss your options with the appropriate professionals such as your estate planning attorney, financial advisor, and accountant. They’ll be able to advise on tools and strategies you’ve researched, but also provide clear information and counsel of options you didn’t even know about. It’s your professional advisors’ jobs to present you with all the info (benefits and potential detriments) you need to know to make an informed executive decision regarding your estate.

Review estate plan

You should review your estate plan annually regardless of any legislative changes, but with the new tax law you’ll certainly want to review your will, any trust documents, estate planning goals, and overall tax strategies. Again, discuss your options with a qualified estate planner!

Contact me for a free consult

Let’s talk about what the new tax laws mean for you, your family, and your legacy. How can you leverage the increased exemption rate to make a difference in your community? How can you better prepare your heirs when you’re not around to support them and offer guidance? Contact me for a free consultation via email or by phone (515-371-6077).

this week calendar

Believe it or not, National Estate Planning Awareness Week is a very real thing. Let’s kick it off with a brief history on the Week and estate planning in general.

National Estate Planning Awareness Week was an effort spearheaded by the National Association of Estate Planners & Councils (NAEPC) and Rep. Mike Thompson (D-CA) (with 49 other Representatives on board). In September 2008, Congress passed H. Res. 1499 which designated the third week in October as a week for assisting the public in understanding the importance and benefits of estate planning, as well as how to assemble a qualified team of experts to assist in the process.

Sure, you won’t see decorations for sale for National Estate Planning Awareness Week…but, you can still celebrate by discussing your estate planning needs and goals with a qualified, experienced estate planning attorney. This goes for your first (much needed) estate plan, but also revisions on existing estate plans. (Remember, estate plans never expire!)

Time Warp: A Brief History of Estate Planning

For as long as people have had property, that property has been distributed or passed along in some manner or another. In early cultures property was considered to be owned collectively by a family or tribe and when a leader of the group perished the assets were divided in accordance with family/tribal customs.

Estate planning was apparent in ancient Rome under the Code of Justinian which recognized oral and written wills that were approved by a public official. In the Anglo-Saxon period of England, royalty had to approve land transfers. That changed in the 12th century when property would automatically pass to the eldest son. Under English law, the Statute of Wills was established in the 16th century which allowed landowner to pass along their land as they wished, whether that was to the eldest or not.

Current state intestacy laws are a modern iteration of British common law in which property inheritance passed to the spouse and children in pre-defined percentages.

Unfortunately, women were often excluded entirely from estate planning; assets were only distributed amongst male heirs at law and women were disinherited. At certain points throughout history, women (such as a wife or daughter) could be provided for through a trust upon the death of the husband/father, but often that trust was dissolved if/when the woman married/remarried. Thankfully policy and society progressed, and now women and men have equal right to inheritance and ability to distribute assets.

To that point, the individual American citizen of today has the freedom to plan for distribution of property as wished without approval needed or mandate defining who can and cannot be a beneficiary.

Estate Planning in the United States

Statue of Liberty

In U.S. history estate planning has been intricately linked with estate taxes because estate planning techniques are tools to reduce or even eliminate the Federal estate tax. To understand that in full you could go all the way back to the Stamp Act of 1797, where a tax was passed to fund the Navy in an “undeclared war with France.” The estate tax was subsequently abolished and then reinstated with corresponding wars including the Civil War and Spanish American War.

The estate tax, more or less as we think of it today, was instituted in association with World War I in 1916. To bypass this, people would gift parts of their estates to their families to which the lawmakers responded to by passing a gift tax in 1924. It was briefly repealed and then re-enacted in 1932 and remained that way until 1976 when the gift and estate tax were consolidated.

In modern political history the estate tax has seen a few major changes; it was entirely revoked in the 2010 calendar year after 2001 legislation phased out the tax. However, that didn’t last long. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 meant a return of the estate tax, but raised the exclusion to $5 million for 2011 and 2012. Then came the American Taxpayer Relief Act of 2012 which kept the $5 million inflation-adjusted exclusion figure, but increased the maximum rate of the tax to 40 percent from 35 percent. In 2017, the exclusion rate sits at $5.49 million per individual. This means an individual can leave $5.49 million to heirs and pay no federal estate or gift tax.

Final Footnote

All of this history is to say that estate planning, in some form or another, has been an important aspect of societies in the world for a long time. Regardless of the size of your estate, and just like the ancient Romans or Americans of the early 1900s, you want to pass along your assets to the people you care about and want to provide for. Claim your right to distribute your property in accordance with your wishes by ensuring you have an up-to-date, quality estate plan. The best way to get started is with my free (and no obligation) Estate Plan Questionnaire. It’s a great tool for organizing all the important information you and your estate planner need to know when creating your custom estate plan.

 


This is the first of a week’s worth of articles all dedicated to the topic of estate planning as a part of National Estate Planning Awareness Week. Want to discuss your estate plan or talk about the history of the estate tax? Don’t hesitate to contact me.