March 14, 2018
Estate Planning in 2018: Why It’s Important & The New Federal Tax Legislation’s Impacts
Everyone today is “busy.” And many people believe estate planning can be put off until another day.
People will do just about anything, including go to the dentist, before they obtain or update their estate plans. My dad was a dentist and our practices were located on the same floor in an office building. As gentle as he was, I used to comment that I was grateful my clients preferred seeing me over “dealing with the drills and needles.”
Just as my dad practiced preventive dentistry, it is much better to be preventive and proactive with your estate plan.
Why Estate Planning Is Important, Now
Remember, if you do not have an estate plan, the state in which you are domiciled has one for you. You likely would not want what it has for you or your loved ones.
There are many benefits of estate planning and estate plan reviews. They enable you to control your property while you are alive, as well as take care of you and your loved ones if you become disabled. Estate planning also allows you to give what you have, to whom you want, the way you want and when you want. You can save professional fees, court costs and tax dollars, as well as reduce stress by planning. Estate plans enable you to leave a lasting and positive legacy.
Planning objectives in our rapidly changing world include, but are not limited to:
- Focus on the assurance of the continuation of lifestyle
- Planning for clients with real estate in more than one state
- Planning for state estate and income taxes (AKA Domicile Counselling)
- Retirement planning
- Protecting physical and financial health in the event of incompetency and disability
- Probate avoidance
- Asset protection and divorce protection planning (AKA predator protection planning)
- Planning for blended families
- Planning for minors, including the payment of education expenses
- Planning for high-risk, disabled and “spendthrift” beneficiaries and charitable planning
- Planning to pass “values” in addition to “value” to loved ones
Estate Planning Considerations & Questions to Ask Yourself
When it comes to your estate planning needs, the sooner you start planning, or review your current plan, the better. Important considerations for creating an effective estate plan include:
- How old is my current estate plan?
- How is my current estate plan affected by changes in personal, family and financial circumstances?
- When did I last formally review my plan with my estate attorney?
- Are my family’s assets structured in a way that limits our exposure to potential liability?
- Is my current estate plan structured in a way that will promote efficient administration and minimize family effort and expense, or even controversy, in the event of disability and at my death?
- Will my qualified retirement account(s) pass to my beneficiaries in the most protected and tax-efficient manner?
- Have I implemented planning that will allow my business to continue operating after my incapacity or death? How do I pass the value of my business to my family?
- Do I have financial and medical powers of attorney that express my wishes and allow my family to make financial and healthcare decisions in the event of my incapacity?
- Do I have a living will?
- How is my current plan affected by recent state legislation such as the Maryland Trust Act?
- How is my current estate plan affected by the recent federal tax legislation?
Estate Planning Under New Tax Law
Significant changes to the federal gift, estate and generation-skipping transfer (GST) tax system are effective as of January 1, 2018. Unfortunately, the new law provides neither certainty nor simplicity.
These changes will impact everyone. All wills, trusts and estate plans should be reviewed in light of these changes. Note: This article is not covering planning for non-citizens or non-citizen spouses.
Some of the biggest changes that will impact estate planning in 2018 include:
- Transfer tax exemption amounts double from $5 million to $10 million per person for all transfers (estate, gift and GST) January 1, 2018 through December 31, 2025.
- The transfer tax exemption amount increases sunset January 1, 2026!
- The transfer tax exemption amount for gift, estate and GST will be inflation adjusted, but the calculation for inflation adjustments has changed from the Consumer Price Index (CPI) to the new Chained CPI (C-CPI). Unlike the CPI, which examines a fixed basket of goods and services, the C-CPI is calculated assuming that consumers make substitutions as the cost of goods rise. For example, as the price of beef increases, consumers may purchase chicken. Accounting for this substitution means that inflation is seen to grow more slowly, on average about 0.25% slower under the C-CPI calculation versus the CPI calculation. Because C-CPI provides for substitution of goods and services, it is also subject to frequent revision. Final revised data for the 2018 C-CPI calculation may not be available until the end of 2018, so only then will we have the final inflation adjustment for 2018 increases. Yes, you read this correctly!
- Under the new chained CPI, the 2018 exemption amount is anticipated to be $11.18 million per person.
- Married clients have an estate planning advantage: If the surviving spouse makes a timely and proper election, the deceased spouse’s unused exclusion (DSUE) amount is available for the surviving spouse. This is known as portability and it is available for the federal gift tax and estate tax exemption.
- Many married couples whose estate plans include family trust planning solely for estate tax planning purposes, and whose combined net worth is unlikely to exceed $11 million, may now prefer less complicated estate plans, and they may want to look at portability planning.
- Planning for higher basis and income tax planning is an important part of estate planning. The old maxim, “when in doubt, gift it out,” has changed since many people are less concerned about estate tax planning and more concerned about basis and income tax planning for themselves and their loved ones.
- If sunset actually occurs and we return to $5 million per person, estimates are the 2026 transfer tax exemption amount will be approximately $6,750,000 with annual C-CPI increases.
- Can we preserve the current exemption increase before it vanishes before our eyes? It depends. For most clients, unless they use it or die before January 1, 2026, the increased estate tax exemption amount vanishes!
- Importantly, Maryland, other states and the District of Columbia are considering legislation to reduce and/or otherwise change their estate tax exemptions in light of the new federal tax law. We must continue to plan for state estate tax in cases where change of domicile is not an option.
As we look at the present and future of estate planning, flexibility, collaboration among planning professionals and timely implementation will be the keys to planning success more than ever.
It is very important to regularly review your estate plan and work with a collaborative and proactive professional estate planning team, including your estate attorney, accountant and financial advisor. You should review your estate plan with an estate planning lawyer at least every two to three years because all estate plans require ongoing maintenance. Beyond changes in the law and tax law, changes in health, your family, your work circumstances and your net worth could significantly affect the effectiveness of your plan. Many of my clients annually review their plans just as they annually see their medical doctor and dentist.
The only way to ensure a secure future for you and your loved ones is by implementing a strategic estate plan. Don’t wait until it’s too late, schedule an appointment with a professional estate planning attorney today.
About the Author
Lena S. Barnett is nationally recognized as a top estate planning attorney, author and speaker. She is a member of Revere Bank’s Lower Montgomery County-DC Regional Board.