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Impact of the New Tax Law on Estate Planning

The Tax Cuts and Jobs Act of 2017 (‘Act’) became effective on January 1, 2018 and is the first significant change to the tax code since 1986. Whether or not one agrees with the underlying change in tax policy, the Act will affect many financial and estate planning decisions for individuals and families. These changes go beyond the well-known reductions in individual and corporate income tax rates and can also alter asset planning and distribution methods.

Some had hoped that Congress would repeal the estate tax entirely, but that was not the case in the final bill signed into law. However, there were changes that could affect some estate plans, and if any of these pertain to you, then it may be necessary to amend your will or trust. Here is quick overview of key provisions, but your estate planning attorney and tax planner will need to advise you on specific steps to take for your situation.

Increase of Estate Tax Exemption

The estate tax exemption is doubled in the Act, and in 2018 will be $11.2 million for individuals and $22.4 million for married couples. What this means is that estates valued less than those amounts will pay no estate tax. The tax rate on amounts over the exemption remains the same at 40%.

Increased Lifetime Gift Tax Exemption

The new estate tax exemption is also applied to lifetime gift amounts, giving wealthy families a significant opportunity to reduce their estate value. Keep in mind that making lifetime gifts will reduce the estate tax exemption by the amount of the gift. (e.g. $1 million of lifetime gifts will reduce the exemption to $10.2 million for an individual)

529 College Savings Plans

The benefit of 529 plans allow tax free withdrawals for educational expenses, and the original contribution to the plan are removed from the estate value. Contributions can be ‘bunched’ together, up to five years’ worth of the annual gift tax exclusion. The annual gift exclusion is $15,000, so a $75,000 contribution is possible in 2018 (twice that for married couples).

The Act also makes it possible to use distributions for elementary or secondary educational expenses, not just for college expenses as before, making this an excellent new benefit for families.

Charitable Giving

Because of the increased estate tax exemption, charities were concerned this might affect charitable giving by wealthier donors. Also, the increase in the standard deduction may keep some taxpayers from itemizing, which is the way to deduct charitable gifts. A strategy of “bunching” gifts is an option for dealing with this change, where one can itemize every other year and double their donations for that year.

However, one positive is that the adjusted gross income limit for charitable gift deductions was increased from 50% to 60%, allowing for larger deductible annual gift amounts. These changes will require some creative estate and tax planning strategies but could result in a lower average tax bill.

The new tax Act is here to stay, so now is the time to speak to your estate planning attorney on any adjustments that you might need to your estate plan.

Written by Andrea Shoup

Shoup Legal, A Professional Law Corporation can be reached at (951) 445-4114.

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