As you likely know, Congress recently passed, and the President signed, the Tax Cuts and Jobs Act at the end of last year. This Act constitutes the most extensive change to the tax code in over thirty years, and significantly alters how individuals and businesses will be taxed. Several important revisions to the tax code have been made that may affect your estate plan. A summary of these key provisions is set out below.
1. Estate, Gift, and Generation-Skipping Transfer Tax Amendments
The Act temporarily doubles the basic exclusion amount for estate and gift taxes, as well as the exclusion amount for the generation-skipping transfer tax (imposed on amounts transferred to grandchildren and others more than 37.5 years younger than you). Under the old law, the first $5.6 million ($11.2 million for married couples electing portability) was exempt from federal estate and gift taxes. Under the new law, for gifts made and/or decedent’s dying between January 1, 2018 and December 31, 2025, an individual is allowed to exempt the first $11.2 million ($22.4 million for married couples electing portability) from federal estate and gift taxes. Prior to this change, only .004% of estates in the country were subject to estate taxes. That number will most certainly decrease even further in light of these changes, leaving estate tax a non-issue for most taxpayers.
However, this does not mean that estate planning itself is no longer important. While it is true that, for most Americans, recent changes in federal tax law has removed the emphasis on estate tax and gift tax planning, the real reasons we need to do estate planning continue to remain at the forefront. These include providing for the management of your assets in the event of incapacity; ensuring your assets are managed and distributed pursuant to your specific instructions at your death; protecting your estate from a spendthrift child, a child’s creditors, and from being part of a child’s divorce proceedings; providing for children or grandchildren with disabilities or special needs; charitable gift planning; business succession planning; and asset protection planning. In short, Revocable Trusts, Wills, Durable Powers of Attorney, and Health Care Directives will still be important tools, even for individuals not subject to the estate tax.
For those individuals whose estates may still be subject to the reach of the federal estate tax (and its 40% tax bracket), the changes to the law offer some important opportunities to take advantage of the increased exclusion amounts before they expire or before a new Congress and President change the law. The current increased amounts provide the opportunity to leverage gifts for the benefit of future generations.
2. Stepped-Up Basis for Inherited Assets
Heirs will continue to receive a “step-up” in basis for property they receive as of the date of death of the decedent. This allows a taxpayer to readjust the value of an appreciated asset upon inheritance, fixing the basis as the higher market value of the asset at the time of inheritance rather than its cost basis (i.e. what the original purchaser paid for it). Therefore, once the new owner decides to sell the asset, capital gains tax will be minimized. Proper planning to ensure that appreciated assets receive a basis adjustment is now more important than ever.
3. Income Tax Rates for Estates and Trusts Updated
The previous income tax brackets and rates applicable to estates and trusts (originally 15%, 25%, 28%, 33%, and 39.6%) have been updated and simplified (10%, 24%, 35%, and 37%). It is important to note that estates and trusts will still reach the highest income tax bracket at only $12,500 of income.
4. Gift Tax Annual Exclusion
The gift tax annual exclusion amount remains unchanged by the Act. However, the rate of inflation has increased the amount an individual may gift to $15,000 per donee, per year.
5. Charitable Deduction Increased
Under the new law regarding charitable contributions made by taxpayers, the original 50% limitation on deductions for cash contributions to public charities and certain private foundations has now been increased to 60% of the taxpayer’s adjusted gross income. Contributions exceeding this 60% limitation are generally allowed to be carried forward and deducted for up to 5 years.
6. Section 529 College Savings Plans Expanded
Section 529 Plans are state-sponsored, tax-advantaged savings plans designed to encourage saving for the future educational expenses of the plan beneficiary. Under prior law, these plans only applied to college expenses. Therefore, tuition for elementary or secondary schools was not a “qualified expense” under the plan. New law provides that up to $10,000 in distributions per year, per child, can be taken tax-free out of 529 Plans to pay for private elementary and secondary educational expenses.
7. ABLE Account Contributions Expanded
ABLE Accounts are savings plans established to meet the qualified disability expenses of the account beneficiary. These accounts are very similar to Section 529 Plans, ensuring that all funds within the account grow tax free as long as the funds are used for qualifying disability expenses, and that such funds will not affect the disabled person’s qualification for Medicaid, SSI, and other government benefits. Previously, total contributions to an ABLE account in a single year from all contributors could not exceed the annual exclusion amount ($15,000 in 2018). New law allows an ABLE account’s designated beneficiary to contribute an additional amount up to the lesser of (1) the federal poverty line for a one-person household, or (2) the individual’s total compensation for the year.
If you have been sitting on the sidelines, waiting to see what Congress would do, the wait is over; the time to review your old documents is now. If you would like to discuss these issues in more detail, please contact a member of our Estate Planning Practice Group to schedule an appointment.