From an estate planning perspective, the highest-profile aspect of the new tax law is that the federal estate tax exemption has been doubled. The jump from $5.5 million to just over $11 million ($22 million for married couples) is significant, and that increase may trigger significant estate planning changes for America’s wealthiest families.
As a practical matter, though, the increase in the estate tax exemption won’t impact many families. Only a fraction of 1% of all estates were subject to federal estate tax before the law change. In addition, the increase in the exemption is temporary.
Though it could be extended, the doubling of the exemption is currently only slated to last until 2025. That means those who have a reasonable expectation of being alive and well eight years from now shouldn’t rely on the new exemption level being in effect when their estates pass to their heirs. And, the viability of taking advantage of the increased gift-giving exemption quickly, while it’s available, remains unclear.
But, that doesn’t mean the new tax law should be ignored, or that you should assume that your existing estate plan still provides the protection you and your family are counting on. While a periodic review of your estate plan is always recommended, the tax law change makes several areas ripe for reassessment.
Estate Planning Review Under the New Tax Law
The specific aspects of the new tax law that are of greatest concern to you and your family will vary depending on specifics such as the size of your estate and the way your estate is currently structured. Your estate planning attorney and tax advisor are the best sources of information about how the new tax law will impact you and your existing estate plan.
Some of the key issues to assess or revisit in view of the Trump tax law include:
- Any planning, such as a tax-shelter trust created in a will, that might be tied to the federal exemption level (either in hard dollars or by reference) should be reviewed.
- Lifetime gift giving should be assessed, though cautiously at the outset. The increased exemption may temporarily increase opportunities for lifetime giving, but the IRS has not yet clarified how these gifts will be treated if the exemption decreases post-2025.
- With significant changes in income tax rates, deductions, and structures, any trusts or other estate planning vehicles employed to reduce tax liability should be re-assessed.
In addition to these core estate planning issues, changes in the taxation of both businesses and trusts mean the time is right to revisit business structures and how business interests are held by individuals or trusts. Since these issues are often inextricably entwined with estate planning strategies and structures, a comprehensive review makes sense.
The Importance of Flexibility and Review in Estate Planning
The significant change in the federal estate tax exemption illustrates the importance of both flexible estate planning and regular review of your will, trusts, and other estate planning documents. For example, an estate plan that specifically addressed treatment of the balance of an estate exceeding $5.5 million would no longer be appropriately tied to the federal exemption level. But, given the dramatic increase in the federal exemption, a document that directed disposition of assets based on phrasing such as “in excess of the federal estate tax exemption” could have unintended consequences. For example, the latter provision could result in an estate that had been roughly split in half under the old exemption structure passing entirely to one trust or heir, inadvertently excluding a spouse who was intended to receive the excess.
Schedule a Review of Your Estate Plan Now
Because your estate plan is designed to protect you and your loved ones in the event of death or incapacity, you can’t count on having time to review and revise at your leisure. When a change in the law or a change in your circumstances may impact the effectiveness of your estate plan, it’s important to schedule a review as soon as possible.