The 2018 Tax Cuts and Jobs Act (TCJA) that went into effect this year includes many tax law changes, most of which are set to expire at the end of 2025. Among them are important changes to Estate Tax laws with the most dramatic being a doubling of each person’s federal estate tax exclusion amount from $5,590,000 to $11,180,000. For most, the new laws result in federal estate taxes no longer being a concern as estimates show that less than 1,800 decedents will pay an estate tax in 2018. So, what are the 99% of families that don’t need to worry about estate taxes supposed to do? Below are five helpful tips:
Tip #1 – Do not take an overly simplistic approach. Just because the “fear” of taxes may have subsided, non-tax reasons for estate planning need to be considered. For many, privacy, maintaining control, creditor and divorce protection, and protecting against spendthrift concerns for child beneficiaries are important considerations. This should not be overlooked as part of a properly designed estate plan.
Tip #2 – Shift the focus to income tax planning. Since estate taxes are no longer a concern for most, income tax planning and the goal of increasing cost basis at death and lowering capital gains tax for beneficiaries should be a priority. The thinking shifts from “estate exclusion” to “estate inclusion”.
Tip #3 – Maintain flexibility. It is important to remember that the current laws are set to expire at the end of 2025, and unless permanent changes are made (or extended), they will revert back to 2017 limits. Utilizing strategies such as disclaimers or using customized funding formulas in estate planning documents can provide the flexibility needed to make the best decisions given the family circumstances and laws in place at the time.
Tip #4 – Don’t forget about the laws of the state you live in. Some states, including Illinois, have different exclusion amounts than the Federal limits (IL exclusion is $4M) and all states (except for Alaska) do not allow for state exclusion portability which means you “use it or lose it”. When residing in a “decoupled” state, it is important to understand the state specific laws and when available consideration should be put into additional planning. For example, in Illinois, QTIP planning allows for the utilization of each spouses $4M exclusion while delaying any potential tax that may be owed on values above this threshold until the second spouse dies.
Tip #5 – Elect portability. Portability is the ability for a deceased spouse to “pass along” their unused Federal exclusion amount to the surviving spouse. In most instances, portability should be elected at the death of the first spouse by filing a timely form 706. Doing this serves as a form of “death tax insurance” and can offer protection should laws change or the value of the second spouse’s estate increases dramatically.
Although the recent tax reform has created an opportunity for many, it has also created confusion and uncertainty. With the new laws set to expire at the end of 2025, there is a window of opportunity to properly plan and make sure that the family wealth is protected against unnecessary taxes should the current laws change, or personal circumstances change. Your BDF team, in conjunction with your estate planning attorney, can help you navigate these uncertainties and make sure your current estate plan is aligned with your specific circumstances and goals.
John D. Smith, CFP® is a Wealth Manager at BDF. A member of the Business Owner Team, he is adept at helping business owners integrate their unique business opportunities and risks into their personal wealth management plan, due to his 20+ years of experience. He finds that business owners, in particular, are often so focused on making sure that their business operations are running smoothly, they may overlook their personal financial well-being. John received his Bachelor of Science degree in Financial Counseling and Planning from Purdue University. He is a member of the Chicago Estate Planning Council and the National Association of Estate Planners and Councils and holds the ACCREDITED ESTATE PLANNER® designation. He is a member of the Financial Planning Association and a member of the University Club of Chicago and is Chairman of the club’s Wine Society.