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How does the new tax law effect my estate plan?

The new tax law may result in a need to update your estate plan.

President Donald Trump followed through on his promise to push forward a new tax plan. The new tax has led to numerous changes. These changes likely impact everything from your paycheck to your estate plan. One of the biggest changes to affect estate plans involves the increase in the federal estate tax exemption.

How has the federal estate tax exemption changed?

In the past, the federal estate tax exemption was set at $11 million per couple. This meant each couple could transfer an estate of up to $11 million in worth without having to pay a federal tax on the transfer. The new law increased this amount to $22 million. The change could result in a domino effect to your estate plan.

Those who are reviewing tax implications on their estate plan should also take state taxes into consideration. Some states, like California, have phased out such taxes. Others continue to apply a tax to these transfers.

How will the change impact my estate plan?

Estate plans serve a number of goals. One function often includes a reduction of tax obligations. The use of various legal tools, like trusts, can reduce this tax obligation. The larger exemption amount may make these legal tools less necessary.

There are circumstances when trusts remain a vital tool in an estate plan. Examples include:

  • Probate avoidance. Probate, a long and often expensive court process, is generally a required step when assets are transferred to the next generation. A wisely structured trust can help your family avoid probate. This can reduce the amount of time it takes to transfer the estate, save the estate money and help your family’s affairs remain private (as this court process is generally part of the public record).
  • High net worth. Families with a net worth that exceeds the exemption amount will still stand to benefit from the use of these tools.
  • Special needs. Families will also likely need trusts in the event that they intend to bequest assets to a loved one with special needs. A failure to structure such bequests wisely could result in the loss of government benefits to the beneficiary.
  • Specific bequest. Trusts also provide the giftor with a level of control over the inheritance. The trust can be structured to make the asset transfer contingent on the recipient completing a higher level of education or can include language to better ensure the assets stay within the family in the event of a divorce.

Although some families may transition away from the use of a trust after the passage of this new tax law, other legal tools used to compose an estate plan remain necessary and may need to be revisited. These include durable power of attorney and advance health care directives. The durable power of attorney document is designed to guide the management of your assets in the event you are unable to communicate. Such incapacitation could occur as the result of a sudden accident, like a car crash, or while battling a long-term disease. An advance health care directive is also important, as it guides decisions regarding your medical care.

The new law provides an opportunity to review your estate plan. An attorney experienced these matters can guide you through the process.

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