Tax Changes and Estate Planning

How the Recent Tax Changes Impact Your Estate Planning

Estate planning is something that many people put off doing. And with the recent passage of the Tax Cuts and Jobs Act, those same people may feel that they can push estate planning even further down their list of priorities.

Under this new tax plan, individuals can give away up to $11.2 million when they die without having to pay estate or gift tax, and couples can give away up to $22.4 million. While this may be welcome news for the super wealthy, most Americans didn’t have to worry about estate tax even before the new law went into effect. For most, estate planning has nothing to do with avoiding estate tax.

Estate planning is all about passing on your wisdom and values, along with your assets, minimizing the headaches and heartaches in the process. For most people, this includes  avoiding the probate process, ensuring you have a plan in place should you become ill or incapacitated, managing assets to pass to your dependents, legacy gifting for charities, and providing security for a surviving partner, spouse, or other loved ones.

So, while you should not put off estate planning just because of the new tax laws, some of the changes may impact your decisions as you plan for the future.

Discover how the Hammond Law Group’s estate planning professionals can help you navigate the new tax laws.

First, the Basics

Every tax payer is going to feel some impact from the new tax laws. All of the income tax rates were lowered, some of them by a couple of percentage points, and the tax brackets have been revised as well. For example, a married couple that earns $170,000 and files their taxes jointly will fall in the 24 percent tax bracket for 2018. Last year, that couple was in the 28 percent bracket.

The first surprise will likely be with the personal exemptions and deductions.

“People are used to taking exemptions for themselves and then their kids as dependents – those have all gone away,” said Mark Geris of Geris Zebarth, Inc. “As a supplement for getting rid of the deductions, they added a more robust child credit, and it doesn’t get phased out by income,” said Geris.

“In addition, the standard deduction was basically doubled, and there have also been changes made to the itemized deductions. The miscellaneous itemized deductions have been removed, while the state and local income tax (SALT) deduction has been revised. Previously, there was no maximum for this deduction. Now, the most you can deduct in one year is $10,000.

“For people in Colorado, this change is probably not a big deal unless you are a really high earner and you pay a lot of state tax. For states that don’t have income taxes and have high property taxes, you could lose a pretty good chunk on your itemized deductions.”

Tax Changes that Impact Estate Planning

In addition to the increase in the estate tax exemption (which we’ve already mentioned won’t impact 99 percent of all Americans), individuals can now give up to $15,000 to another individual without using their any of their lifetime exemption. That’s up $1000 from last year, and married couples can gift $30,000.

There is some concern that legacy donations may see a decrease due to these increases in estate and gift tax rates. In a likely effort to alleviate these possible declines, the recent tax law raises the amount one can claim as a charitable deduction from 50 percent to 60 percent of adjusted gross income. However, Catherine Hammond, attorney with the Hammond Law Group, doesn’t believe most legacy gifts are motivated by tax savings.

“For the vast majority of people, saving on estate taxes is not the motivation factor for charitable giving. The biggest benefit for them is to do some good in the world while supporting a cause they are passionate about. The fact that there might be some tax benefit is just a bonus.”

There has also been a change made to Section 529 Plans. Before the Tax Cuts and Jobs Act any growth and withdrawals from a 529 were only tax free when used for eligible college expenses. Now, these accounts can be used to pay for expenses related to public, private, and religious schools for kindergarten through grade 12, too.

“At the federal level the deductions to a 529 are not tax deductible. The only benefit is that 529s are allowed to grow tax free as long as you use it toward eligible education expenses. However, if it is a Colorado-sponsored 529 plan, you get a deduction from state income tax for what you contribute to it. At the state, it basically works like a 401k because you are getting a tax deduction,” said Geris.

“The problem is that the Colorado legislature has not ruled yet on how they are going to handle this. Currently, people with children in private school that put money in a 529 first, would basically be able to deduct their tuition for Colorado state taxes if there’s no change to Colorado law.”

Currently, the Colorado House of Representatives is considering two bills – House Bills 18-1221 and 18-1209 – to determine whether or not state law will align with the federal tax change.

Planning for the Future

Whether you think these new tax laws impact you or not, you should review your estate plan to be certain. And if you don’t have an estate plan, it’s time to get one.

“Realistically, I don’t think most of these tax reductions for individuals will be around more than three to five years,” said Geris. “It’s important to plan because this could be an opportunity where there is something in this that could be taken advantage of before it is gone.

“That is a philosophy, I believe, should be applied across the board. Just as you should be planning financially and for taxes, you should be planning for your estate. Should something happen to you are you going to be able to handle those medical expenses? Are you prepared to smoothly pass assets to your heirs? What are your goals in passing wealth on to your family? If you don’t go through estate planning, you are missing an opportunity.”

Even with constantly shifting tax laws, navigation your estate planning doesn’t have to be difficult, discover how the professionals at Hammond Law Group can help you.