As you very likely already know, Congress passed the Tax Cut and Jobs Act late last year, and the Act is now in effect. There were quite a number of changes in the tax law, but since I’m an estate planner, I will be focusing on the changes that affect people’s estate plans.
From an estate planning perspective, there were not any real structural changes. A surviving spouse can still carry over their deceased spouse’s unused estate and gift tax exemption, essentially doubling the amount that can be excluded from payment of federal estate taxes. Congress also kept the basis adjustment for inherited property. The basis adjustment – or “step-up in basis” – allows heirs to inherit property for the fair market value at the time of the person’s death, rather than what the property was worth at the time the deceased person purchased it. This helps heirs to avoid massive capital gains taxes when they sell an asset that the deceased person had held for a long time, such as a residence or stock in a company. With a step-up in basis, capital gains taxes will be calculated based on the difference between the value at the time the previous owner died, and the value at the time the asset was sold.
The biggest change that will affect estate plans is the increase in the amount of the estate and gift tax exemption. The exemption is effectively doubled: any individual worth less than ten million dollars (twenty million if you’re married) will not owe federal estate taxes. However, this change is not permanent: in 2026, the exemption will go back to the current levels (about five million for individuals, ten million for couples, indexed for inflation each year).
So what does this mean for you, the reader? If you’re worth less than five million dollars, you may not need to do anything – your estate plan is likely unaffected by these changes, but it wouldn’t hurt to check with an estate planning or tax professional to make sure. The same is true for wealthy people who are worth more than ten million dollars. The people who will be most significantly affected are the ones that fall in the middle. Since the exemption amount is set to decrease in 2026, it may not be a good idea to reduce the complexity of their current plan. A better idea would be to start implementing the plan now, while the exemption is still high. That way, when the exemption drops, the irrevocable trusts, life insurance policies, and other tax avoiding and tax reducing accounts will be fully funded and free from further taxation.
If this explanation is unclear, or if you have further questions, please don’t hesitate to contact me at email@example.com.