Estate plans have long been an essential vehicle for keeping federal estate taxes low, but recent changes to tax laws surrounding estate plans make now a great time to review your plan with a tax advisor.
The 2018 Estate Tax Law Changes
The most significant changes to estate taxes were voted into law in 2017 and enacted in 2018. Although that was two full tax years ago, many people create an estate plan and think they’re done with it forever, so you may not have reviewed yours since the laws changed.
The Tax Cuts and Jobs Act of 2017 increased the exemption for federal estate taxes to $11.18 million for an individual, a number that will increase with inflation. In 2020 it’s $11.58 million. Above that amount, the federal tax rate is 40 percent (state tax rates may vary, and exemption thresholds may be lower).
That means most estates today fall under the exemption to avoid taxes, but you may have set up your estate in such a way that it will surprise your heirs. For example, as recently as 20 years ago, many people with smaller estates employed complicated strategies to leave items to their spouse or children that now could pass through to their children tax-free because the exemption was only $675,000 in 2001.
Tax laws—and their effects—change regularly. For example, during a three-year run between 2010 and 2012 the tax rate bounced from 45%, down to 0%, then up to 35%. So, if you haven’t reviewed your plan recently, you may still have overly complex provisions in your estate that made sense at the time but don’t anymore.
Another change since 2017 is the impact of capital gains. Inheriting property or stocks that have increased in value and then selling them could have capital gains tax implications. But with the change in laws, it may now be better to give the property to your beneficiaries through your estate rather than gifting it through a trust or another vehicle.
When to Review Your Estate Plan
Aside from major tax law changes, some other life events should also trigger an estate plan review with your tax advisor. These could include:
- Change in your marital status (marriage or divorce)
- Illness or death of a spouse
- Change in number of dependents (birth of a child, adoption, new stepchildren, etc.)
- Other changes in dependents, such as parents you now care for
- Changes in your wealth or the total value of your estate
In addition to these events, you should regularly review estate plans whenever significant changes are made to the tax laws, which your tax advisor tracks and can let you know about. The current Tax Cuts and Jobs Act of 2017 is set to expire in 2025, so we may see changes again soon.
If you haven’t reviewed your estate plan in more than five years, contact Cantley Dietrich today to find out what changes you should make to take advantage of new estate tax laws.