April 17, 2018

The New Tax Law and Estate Planning

By Robert D. Steele

The new tax act, popularly known as the Tax Cuts and Jobs Act (the “TCJ Act”), became effective on January 1, 2018 and made many drastic changes to our Federal tax laws. This article provides a summary of certain key aspects of the TCJ Act as it relates to estate planning.

Although the basic rules of the estate and gift tax remain the same under the TCJ Act, its estate and gift tax implications are very far reaching. Under the TCJ Act, the Federal estate and gift tax exemption has doubled from $5,000,000 per person to $10,000,000 per person, plus an adjustment for inflation, making the total exemption from Federal estate and gift taxes in 2018 $11,180,000 per person. Married couples in many instances can combine their individual exemptions, allowing them to transfer up to $22,360,000, free of Federal estate and gift tax.

While the increase in the tax exemption under the TCJ Act might seem to make estate planning easier, it does not for three main reasons: Firstly, the exemption increase is only temporary. With the TCJ Act set to expire at the end of 2025, the 2026 exemption reverts to the 2017 amount (plus inflation). Planning, therefore, must anticipate the potential future reduction of the estate and gift tax exemption. Secondly, the most important feature of any estate plan is the needs and desires of our clients and their families. The plan must be carefully crafted to pass assets (including family businesses and real estate) to the right people in the best manner possible, often using trusts, for example. This is paramount regardless of the tax laws. Lastly, the New York estate tax exemption will remain the same in 2018 ($5,250,000 per person), increasing in 2019 to only one-half of the Federal exemption (probably $5,600,000). The gap between the New York and Federal exemptions makes careful planning tailored to each client’s assets more important than ever. In 2026, when the Federal exemption reverts to its prior amount, the New York and Federal exemptions will be the same. These changing amounts make careful estate planning crucial.

Simply stated, estate planning is not a one-time isolated event. Due to changes in the tax laws, family assets and family goals, estate plans must be revisited periodically. As with all significant tax law changes, the change in the Federal tax exemption makes this a very important time to re-examine and re-evaluate all estate plans.