Financial Advice and Estate Planning Strategies
When lawmakers passed the Tax Cuts and Jobs Act late in 2017—doubling the lifetime exclusion for gift and estate taxes to $11,200,000 per person for 2018 (adjusted for inflation), those who believed the only goal of estate planning was to avoid estate taxes probably concluded that estate planning was no longer needed for most individuals and families.
This assumption makes it difficult for many of us to realize that these important law changes may necessitate review of your current plan to make sure your estate will distribute assets as desired and in the most tax-efficient manner.
Here are a few changes as a result of the new law:
- Income tax planning is now a more important part of many estate plans. In order for you to reap maximum benefits from planning, your estate attorney will want to work closely with your tax accountant (CPA) and your financial planner.
- Considering the doubled lifetime exclusion amount, it may no longer be necessary or desirable to use grantor trusts to lower one’s taxable estate. This planning strategy allows the grantor (i.e. the person setting up the trust) to pay income tax on the trust income each year, thus, reducing his or her taxable estate by income taxes paid on assets that are actually owned by the grantor trust. Now, income tax benefits may be gained by using a non-grantor trust that pays its own income taxes as a separate taxable entity.
- The use of life insurance within your estate plan may also change. Owning a life insurance policy designed to pay estate taxes will no longer be necessary for most estates. Your estate planner will need to consider whether the benefits a policy may provide continue to justify the cost under the new rules.
In order to understand the effect of the new tax law on your personal estate plan, a review of your current estate plan is recommended. Keeping your estate plan current will ensure you’re taking advantage of new opportunities as well as confirming your assets will distribute to your heirs as you desire. If a plan review reveals that estate plan changes are needed or desired, we will work with your estate planning attorney to make sure proper updates to your documents are completed.
New planning strategies may be required in order to make best use of new increased exemption amounts while they are available. The doubling of the exemptions mandated by the new law is a temporary benefit. After 2025, the exemption amount will return to the original $5 million amount (adjusted for inflation).
Further, future law changes may repeal this and other benefits before 2025. Historically, law changes have been “grandfathered in,” meaning, if you use your full exemption amount to gift assets during this 2018 through 2025 time period, any new law enacted later shouldn’t undo your careful planning. However, those who don’t use their higher exemption amount while it’s available may lose it forever.
The new law didn’t change the importance of asset protection and asset distribution in any effective estate plan. We all want our hard-earned assets to benefit the people and organizations we held dear once we pass on, and we want those assets to be protected from those who may try to lay claim to them without merit.
Overall, the goals of estate planning have been substantially transformed by the new law. Many times, prior to the law change, estate planning centered on avoiding estate taxes and asset protection. A well-crafted estate plan can and should still achieve asset protection and estate tax efficiency (i.e. legally avoid estate taxes, if possible). Since the new law has essentially eliminated all estate taxes for everyone except for those with assets exceeding the new exemption thresholds, asset disposition (who gets what) and income tax planning have moved to center stage for the estate plan of most people.
The best way to ensure your estate plan is up-to-date considering the new laws is to schedule a review with us and update accordingly with the help of your estate planning attorney, if necessary.
As Principal and Wealth Management Specialist, Gary Dalessandro, MS, CPA/PFS, CFP®, provides integrated tax, financial planning, and estate planning advice for clients and assists lead advisors in developing appropriate strategies to help clients achieve their lifetime financial goals. If you have questions regarding the SECURE Act or other financial planning topics, contact Gary at email@example.com.
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