After long debate, the Tax Cuts and Jobs Act has finally been passed into law. A long and complex document, the tax reform has implications on myriad areas of an individual's life. The changes these new tax regulations have on estate planning are worth understanding in full.
The new law doubles the following exemptions--but only for the next eight years:
- Combined gift/estate tax exemptions: $11.2 million
- Generation-skipping transfer (GST) tax exemption: $11.2 million for individuals; $22.4 million for couples
What does this mean?
Since most individuals in the U.S. are not worth tens of millions of dollars, these exemptions are predicted to considerably reduce the number of U.S. estates subject to estate tax. However, come 2026--providing there has been no subsequent reform to the current legislation, we will see the reinstatement of the 2017 exemption levels.
The fact that these exemptions are temporary creates an added layer of complexity from an estate planning perspective--since it is impossible to predict exactly when someone will pass on. Under the current law, there could be an enormous difference in a beneficiary's tax burden if their loved one's death occurred in January, 2026 as opposed to in December, 2025.
Workarounds to the exemption deadline
- For grandchildren--and other descendents that skip a generation--it is extremely important to avoid the GST tax--which can amount to a 40% loss in inheritance. Establishing a dynasty trust for your grandchildren can be an effective way to provide tax-free benefits. An estate planning professional can advise you on the length of time such a trust may be active in your state.
- A second option is to create a tax-free lifetime gift. Allocating your money in this way protects your beneficiaries from owing estate tax. However, beneficiaries can still be subject to income tax if they later sell a gifted asset, so it's important to weigh the relative gains and losses provided under this option.
In light of the recent tax reform, even estate plans that were developed recently could benefit from reevaluation. Staying apprised of how legislative changes impact your estate plan can help you to ensure that you beneficiaries inherit in the manner you intended.