What Are the New Tax Law Exemptions for Estate Planning?

Another tax season is here, and Americans have more questions than ever. The reason is that the United States government drastically overhauled its tax code in 2017.

In December 2017, the U.S. Congress passed the Tax Cuts and Jobs Act (TCJA). President Trump signed the TCJA, and its implementation started with the 2018 tax season.

The tax overhaul affected many areas, including corporate rates and personal income taxes. It also had a significant impact on the tax policy for estate planning.

Read on to learn about the new tax law exemptions in regards to estate planning. Explore changes due to the TCJA and find out how it may affect you.

Estate Tax before the TCJA

First, it is important to understand how the estate tax worked before the passage of the TCJA. In the past, transferrable property up to $5.6 million was exempt from estate and gift taxes.

The $5.6 million threshold was set in 2011 and adjusted higher for inflation each subsequent year. For married couples, the threshold increased to roughly $11.2 million.

The term portability also factors into estate planning for married couples. This means that if a deceased spouse did not use the full exemption amount, the remainder can be transported to the surviving spouse.

Estate Tax under the TCJA

The most impactful change is that the TCJA doubled the estate and gift tax threshold. In 2011, the base exemption amount was doubled from $5 million to $10 million. Again, this value is adjusted upward for annual inflation and sits at $11.18 million in 2018.

The threshold also doubled for married couples. Adjusted for inflation, the new threshold is approximately $22.4 million.

After the changes, the bottom line is that fewer Americans are subject to estate taxes. Tax experts estimate that 40 percent fewer Americans will pay this tax each year.

Impact on Professional Estate Planners

Since the tax threshold doubled, some people are mistakenly putting off estate planning. They think that since the exemption is so much larger estate planning is no longer necessary.

For starters, this thought process is misguided as the new thresholds have an expiration date. According to the TCJA, the elevated levels will continue until 2025 and then revert back to prior amounts. The expiration date is less than a decade away, and estate planning is a long-term strategy.

Furthermore, each state has its own unique estate policy (see a proposed bill in California to drastically increase the in-state estate tax). The TCJA only affects federal law and does not affect rules governing the residents of Idaho and Washington State.

With the new thresholds, your estate plan may need to be adjusted. This includes updating old documents that are no longer optimal due to the TCJA changes.

A Recap of the New Tax Law Exemptions

The TCJA is providing estates with temporary benefits through 2025. However, it is still imperative to develop an estate plan with the help of professionals.

Otherwise, you run the risk of losing out on provisions intended to benefit you at the state or federal level. If you want to learn more about the new tax law exemptions, contact us to schedule an appointment today.

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