They don’t call the Tax Cuts and Jobs Act an “overhaul” for nothing.
The new law effectively took a red pen to many pages of the federal tax code, altering many deductions and impacting how we prepare for everything from homeownership and parenthood, to retirement and death.
Yes, death. The tax overhaul stands to impact the estate planning of some wealthy folks.
How you are impacted comes down to the size of your estate — and two caveats.
Estate planning for the wealthy
The tax overhaul increased the federal income tax exemption threshold for estates.
Previously, the federal tax code set what it calls the “basic exclusion amount” for estates at $5 million. But now that amount is $10 million.
Reuters explains that this basically means fewer people will need to worry about taking pains to minimize estate taxes:
“Strategies that financial planners and trust attorneys have been using for years to help families avoid paying estate taxes may now fall by the wayside, because the exemption for the size of estates has doubled … It was just $600,000 in 1997.”
So, unless your estate is worth eight figures, you probably need not worry about federal estate taxes.
If you’re fortunate enough to have an estate of that size, educate yourself about how the changes could affect you.
See Section 11061 of the overhaul legislation — titled “Increase in estate and gift tax exemption” — and the Internal Revenue Service’s “Estate Tax” webpage. Then, consider talking to a qualified financial adviser.
Estate planning for the rest of us
The newly doubled estate tax exemption doesn’t mean folks worth less than eight figures can forget all about estate planning.
If you care about what happens to your assets upon your death — or even while you’re still on your deathbed — you still must take estate planning seriously. That’s because estate planning involves a lot more than just trying to minimize taxes.
As Reuters points out, the process includes steps ranging from making sure the beneficiary information on all your financial accounts is current, to filling out power of attorney and health care proxy paperwork in the event you are incapacitated.
You’re arguably never too young to start taking such steps. So, if you’re yet to take them, start by checking out “Do It Now: 8 Essential Documents for Estate Planning.”
There are two caveats to keep in mind as you plan your estate. Either could throw a monkey wrench into the process.
First, know that the federal tax code overhaul’s provision about the estate tax is temporary.
The increased exemption will be in effect for tax year 2018 (the tax return you’ll file next year) through tax year 2025. In 2026, the tax code reverts to pre-overhaul terms on the exemption, assuming politicians don’t extend or otherwise change it before then.
Also, remember that the federal government isn’t the only party potentially interested in the assets you leave behind. Your state’s government may impose an estate tax or an inheritance tax — or both.
The nonprofit Tax Foundation reports that about 20 states have at least one such tax. So, residents of those states will still need to account for that when planning their estate.
What’s your take on the overhauled estate tax exemption? Sound off below or on our Facebook page.