The 2018 Tax Reform Bill: What you Need to Know: Part II

On Dec. 22, 2017, President Trump Signed into Law the First Significant Reform of the U.S. Tax Code Since Ronald Reagan was in Office. Here is Part II of how it Will Affect Your Finances

May 2018

The new tax act will affect how we make decisions on estate planning, buying a home, health insurance, setting up a business, and even divorce agreements. In this series, we will highlight major parts of the law to keep in mind. Last month we started with individual income taxes. This month we look at estate planning. 

Planning for family wealth transfer is an important step in assuring assets are passed down to your loved ones with the least amount of tax consequences. While the new law did not repeal the estate tax as originally expected, it temporarily doubled the estate tax exemption for single filers to $11.2 million from $5.6 million, indexed for inflation. For a married couple, this means a $22.4 million exemption for the next eight years. 

This provision expires (or sunsets) at the end of 2025 and since death is unpredictable, wealthy individuals should still plan for the estate tax using traditional strategies such as purchasing life insurance policies inside irrevocable life insurance trusts. This will allow for the possible exclusion of life insurance proceeds from the estate tax by acting as both the owner and beneficiary of life insurance policies. However, it is critical that the trust is drafted and funded properly to ensure that your family members receive the full benefit of your life insurance proceeds with the least possible estate tax applied. The law did not modify the current income tax basis rules related to gifts and transfers at death.  

Planning for family wealth transfer is an important step in assuring assets are passed down

Although some may see less of a need to undertake material trust and estate planning, they in fact may miss potentially compelling opportunities. Not to mention that the benefits of avoiding probate alone are significant. Higher exemptions provide increased opportunities for multi-generational, legacy wealth planning. Many are utilizing trust and estate planning increasingly for qualitative and values-based issues above and beyond tax issues. Qualitative measures might include thresholds as to when, how much, and for what reasons future generations can access legacy wealth from a family trust.  

Those with existing estate and wealth plans are encouraged to have their plans reviewed particularly if they were created before 2013. Many current documents will try to maximize funding of the credit shelter trust and may include formula based clauses in order to do so.  With the higher exemptions, this may now result in far less assets being left to a surviving spouse then was originally intended.  

John W. Harris is the managing director and chief wealth advisor for the Coral Gables Trust Company