How the New Tax Bill Affects Your Estate and Trust
February 19, 2018 by Arthur Orzame, CPA
The Tax Cuts and Jobs Act recently signed into law impacts every American at some level, even those who don’t make enough to pay taxes. For those with estate plans and trusts, it is especially important you understand the changes in the tax law that could impact you and schedule a review with your tax accountant.
Exemptions were doubled
The biggest change to be aware of is that as of January 1, 2018, the estate, gift and generation skipping transfer (GST) tax exemptions for single filers increased from $5 million to $10 million indexed for inflation, or approximately $11.2 million. For joint filers the inflation-indexed exemption is anticipated to be about $22.4 million.
But before you start reallocating your estate, keep in mind that unlike some parts of the new law, this change is temporary and expires on December 31, 2025. The next day the increased exemptions revert to the 2017 amounts, again indexed for inflation, unless Congressional action is taken before that time to extend them.
For Americans with assets under the exemption amounts, there are several things you will want to discuss with your tax advisor including whether or not you still need a trust(s) to protect your estate. If your assets are under the applicable exemption amount you may no longer need a trust to enable you or your spouse to keep your assets outright and without threat of hefty estate taxes. Keep in mind as well that certain types of trusts may force creation of a trust when you or a spouse dies, so it may be in your best interest to examine your estate plan trusts and determine what, if anything, should be changed.
Another angle to consider during this exemption window of opportunity is how you can distribute some of your wealth now and avoid future taxes on transfers. One way is to create a dynasty trust, an irrevocable trust that can grow, free of estate, gift and GST taxes for grandchildren or later generations, depending on your state. By transferring an amount within the allowed exemption, you avoid gift taxes on the transaction, and effectively remove those assets from your taxable estate.
Similarly, lifetime gifts offer another opportunity to take advantage of the increased exemption, although these are not eligible for a stepped-up basis, so a recipient who sells a gifted asset will be taxed on gains realized.
Given that most people will likely not be itemizing due to the higher standard deductions, charitable giving may well drop off, at least for those who give solely for the tax benefits. But if you intend to continue giving, you need to know that the new law temporarily raises the adjusted gross income limit for cash charitable deductions to public charities by 10 percent — from 50 to 60 percent through 2025. Before you write any donations checks, speak with your tax accountant about ways to maximize your giving and still get a deduction.
529 College Savings Plans are another area of change and one that deserves a new look if you have one or have a need for one. Formerly only to be used for college costs, the new tax law allows 529 funds to be used much sooner for K-12 education at private schools. Because these are state-managed plans, it is essential that you discuss your current or future 529 Plan with a tax advisor who is informed on the status of them in your state.
Anyone hoping to use the “kiddie” tax to shelter assets by transferring them to their children should be aware that it may no longer be prudent. Under the new tax law, the child’s unearned income is taxed at the trusts and estates bracket level — which after $12,500 in taxable income is reached, becomes the highest marginal tax rate at 37 percent for 2018.
No matter your income or tax status, you can bet the Tax Cuts and Jobs Act will probably impact you and your estate directly or indirectly. When questions or concerns arise, contact Gordon Advisors for up-to-date information and advice.