Estate Planning Re-Engineering – New Tax Reform 2018

In late December 2017, Congress passed the Tax Cuts and Jobs Act, commonly referred to as “tax reform”. This bill was signed into law by the President, and will become effective this year. The law increases exemptions, and notably doubles the amount of wealth that can be passed onto future generations, without estate taxation. However, the law also impacts individual deductions—by placing a $10,000 cap on state and local tax deductions. With all the complexity in the new tax law, it is easy to get confused about how it impacts estate planning and what changes may need to be made to existing plans.

The new tax law, in many ways, creates much planning simplicity and tax benefits for individuals and families creating an estate plan, particularly when planning with counsel from a qualified tax and estate planning attorney. A particularly impactful benefit of the new tax law is the doubling of individual lifetime gift and estate tax exemptions (from $5,490,000 in 2017 to $10,000,000 plus a yet to be released inflation adjustment in 2018). For US citizens gifting or be-questing amounts over this exemption, an estate tax (pejoratively known as the “death tax”) may become due and payable. In addition to the doubling of exemptions for estate plan bequests or family gifting, the complex law creates many tax and planning loopholes that tax and estate planning attorneys can utilize to benefit individuals and families.

The tax law coupled with existing capital gains rules allows the vast majority of well-planned family assets to pass free from any capital gains or estate tax to heirs using revocable living trusts. Such plans, if managed and invested properly during the trust creators’ lives can avoid considerable capital gains tax. As an example, if the trust creators pass away while owning assets which have gained considerable value over their time of ownership (ie. built up gain profits in real estate, stocks or Cryptocurrency), the gains in these assets in the Estate will not be subject to capital gains taxes following the death.

Estate and tax lawyers are frequently creating and utilizing strategies to legally avoid the unnecessary payment of capital gains taxes, whether an estate is worth more than the maximum exemption. Additionally, tax lawyers work to take advantage of more obscure tax breaks, such as the “qualified business income” tax break. While many of these strategies can be beneficial in reducing the amount of taxes that an individual needs to pay, because of their unique expertise, qualified tax attorneys charge considerable fees for their advice and counsel.

Individuals and families with existing estate plans should routinely consult with an estate planning attorney to discussion potential modifications, if necessary. Many existing estate plans that have not been modified in many years still mandate a now mostly outdated and unnecessary irrevocable “credit shelter trust”, upon the death of the first spouse. Due to the many recent changes in the law, it is important to not only evaluate if a burdensome planning structure should be modified before it is too late, but also whether the intended beneficiaries and trustees are in the plan and that beneficiaries are set to receive their inheritance in the best way. Another issue that likely will require careful planning and sound advice exists when non-citizens own property in California or are living in California. The available estate tax exemption will often be far lower (typically only $60,000) for such clients and a significant estate tax burden can be avoided or delayed through proper planning.   Other issues and complexities may arise with the new tax law, and some will require more significant modifications than others. Any issues or planning that arise with an existing estate plan should be handled with an experienced attorney, preferably one that has significant expertise in the existing and new tax laws.

While it is easy to conclude that the new tax law is a boon for individuals and families with larger estates, due to the increase to exemptions and the new ways to navigate tax deferral or avoidance, it is important to invest time with a knowledgeable estate and tax attorney to help discuss and iron out the issues that arise from this complex new law.

To review your circumstances and to address your questions, please make an appointment with one of our attorneys today. We have offices in Long Beach, Downey and Irvine and offer consultations in either English or Spanish. We look forward to meeting with you.