The inauguration of President Donald Trump has come and gone and a new administration begins. But what does it mean for you in regards to your estate plan and protecting what matters most?
A frequent topic of conversation throughout the election was tax reform, specifically the repeal of the estate tax and how income and capital gains taxes might be revised. Tax reform is high on the agenda for both the Trump administration and the Republican Party so we can expect changes are on the horizon.
These changes may or may not affect you, your family, and your estate planning.
What a Repeal of the Estate Tax (Death Tax) Means
First, the repeal of the federal estate tax (also known as the death tax) likely will not directly affect many of us. The passage of the American Tax Relief Act (ATRA) in 2012, already effectively repealed federal estate taxes for 99.8% of Americans because the estate tax exemption levels it set were very high and increase annually for inflation. For example, in 2017 assets valued at $5.49 million per person, or $10.98 million per married couple, are exempt from estate tax upon death. In addition, states like California do not have their own separate estate tax. For that reason, estate tax planning has not been and will continue to not be the prime driver behind most estate planning.
However, if your estate plan has not been reviewed since before 2012, now is a good time to revisit it. You may want to replace outdated tax planning designs that are no longer relevant and serve little purpose for you and your family. In fact, the danger in overlooking this is that your once tax-savvy estate plan may now be poised to create unnecessary and overly burdensome outcomes for your family. Instead, you can update your estate plan to focus on asset protection, flexibility, and providing for your spouse or family in a way that is more consistent with your wishes than tax-driven strategies previously allowed.
On the other side of the coin, the repeal of federal estate taxes will have a much greater impact for the less than one percent of wealthy Americans with high-net worth estates currently valued above the estate tax exemption levels. It will demand changes in their estate planning, as complex tax planning strategies will no longer be necessary. The net effect will be more simplification in planning as well as more creativity in asset protection strategies for the wealthy.
Income and Capital Gains Taxes Will Have a Larger Impact
Estate tax is just one type of tax to consider when it comes to your estate planning. Unlike estate tax, income and capital gains taxes affect everyone. Depending on your state, tax bracket, and asset class (for example, an appreciable asset such as your home, an investment account, or a rental property that generates income), these taxes have the potential to be a quite costly to your estate. So much so that many estate planning and tax experts have begun to refer to these types of taxes as the “new death tax.” As far as potential tax reform, what has been discussed is the consolidation of the number of income tax brackets, revisions to income tax deductions, and how capital gains taxes are calculated. While the Trump administration and the Republican leadership have been fairly consistent in regards to reforms in these areas, they differ slightly on some points, are unclear on others, and appear open to negotiation on all. So, it is difficult to project exactly how these changes might impact a person’s estate or their estate planning. That said, since these types of taxes affect most everyone, any changes here will certainly have a much larger impact on how people approach their estate planning in regards to appreciable assets.
Estate Planning Will Become Even More Important
The more things change, the more they stay the same.
While the proposed tax reforms may affect some but not others, the importance of estate planning will remain constant. Remember, minimizing taxes on an inheritance is just one of many reasons to pursue estate planning.
Foundational estate planning involving wills, trusts, medical directives and powers of attorney still need to be done, since the probate process after death is not going away. In addition, planning to protect minor children, businesses, and out-of-state property ownership will all continue to be relevant priorities for many.
Likewise, planning will still need to be done for beneficiary designations, retirement plans and specialized trusts because the need for retirement planning will only grow as our nation ages. That means we will see the importance of planning for non-spouse beneficiary asset protection, protecting the interest of minors, and utilizing estate planning as a long-term care tool continue to rise.
In sum, a repeal of federal estate taxes will not have an immediate tax impact on many, but will also not make the need for estate planning any less. The true benefit we can hope to see moving forward with the tax reform being discussed is that it will help us as a nation focus on the many other very important estate planning considerations that estate tax planning clouded for so many years. Creating an estate plan and consistently reviewing it is evergreen and will serve to best protect your family, assets, and legacy from the financial and emotional costs of conflict, court, and unintended consequences in the future.
Kevin Snyder is a husband, father, and an estate planning Orange County estate planning attorney and elder law attorney at Snyder Law, PC in Irvine, California. He is passionate about educating others about estate planning and how it can be used to protect what matters most. Subscribe to this blog or register for an upcoming FREE workshop to learn more.