Understanding the New Tax Law Changes: Considerations for Estate Planning

By: Christopher Burns , Stephen Hopkins , Maria Pitner | February 13, 2018
Taxes, Wills & Trusts Agreements

The new federal tax act was signed into law on December 22, 2017. While media coverage focused on cuts in the corporate tax rate (dropping from 35% to 21%) and adjustment to individual income tax brackets (now a top rate of 37%), there are other changes in the tax law that are important to understand – especially since changes take effect immediately and will likely impact almost every aspect of tax, estate, retirement, and business planning.

Here is a summary of some of the changes and how they may affect your estate planning:

Changes in Federal Tax Exemptions for Gifts/Transfers
The federal government imposes taxes on transfers of property made during your life (gifts) or at death that exceed certain exemption limits. Under the new tax law, the amount of those tax exemptions has increased as follows:

  • The gift, estate, and generation-skipping transfer (“GST”) tax exemptions have nearly doubled, from $5.49 million per individual in 2017 to approximately $11.2 million per individual or $22.4 million per couple (exact amount pending further guidance by the Internal Revenue Service).
  • The annual gift exclusion for 2018 is $15,000 per donee, up from $14,000 in 2017.

The change in the federal estate tax exemption has no impact on the Minnesota State estate tax exemption, which currently is $2.4 million per individual. However, unlike the federal exemption which allows married couples to “share” one another’s exemption, Minnesota’s estate tax policy follows a more “use it or lose it” approach. So even if your estate is not taxable at the federal level, you’ll want to ensure your estate plan helps your loved ones avoid or minimize any state estate tax liability by using various estate planning options available to you, such as creation of a credit shelter trust, qualified terminable interest property (Q-TIP) trust, and disclaimer trust.

Impact on Income Tax Deductions
The new tax law doubles the standard income tax deduction, which may impact contributions to charitable organizations and qualified education plans, as well as income and property taxes.

  • Charitable contributions: With the increase in the standard deduction, you may want to consider maximizing your charitable contributions in years you would otherwise itemize your deductions.
  • Qualified educational plans: A 529 tax-advantaged plan encourages saving for college. Now, 529 plans can also be used for elementary and secondary education, so you may want to consider gifting more to these accounts.

Limits on State and Local Tax Deductions
Under the new federal tax law, state and local personal income and property taxes is now deductible only up to $10,000. This change may affect many aspects of home ownership, investing, and tax planning. The size of your estate will dictate the considerations and approaches for creating or revising your estate plan.

  • Smaller Estates: If you have a smaller estate, where there are no state or federal estate tax considerations, you’ll want to ensure inclusion of appreciated non-retirement assets in your estate, so the income tax basis of the asset becomes its fair market value at your death.
  • Moderate Estates: If you have a moderate estate, you’ll want to minimize your state estate taxes and evaluate whether to use some of your increased federal gift tax exemption. Under Minnesota law, there is no gift tax, but gifts made within 3 years of your death may be included in your estate.
  • Larger Estates: If you have a larger estate, you may want to consider planning to minimize future estate taxes on both the state and federal level.

Provisions of the new law, with a few exceptions, sunset in 2025. At that time, the federal estate, gift, and GST tax exemption will revert to approximately $5.6 million. A possible tax clawback could occur, meaning any gifts made over the exemption amount at your death would be included in your taxable estate, even though they would have been exempt under the law when gifts were made. It is important to be aware of the state and federal exemption levels and evaluate whether to use some of your increased federal gift tax exemption before changes occur.

Of course, It is hard to predict whether the new tax changes will remain the same or if a future administration will make changes. But one thing is certain, the tax law is broad and complex. You need trusted advisers to help you understand how the changes may impact you. Now is a good time to create an estate plan, or review your estate plan and determine if tax law changes impact provisions in your current documents.

Non-Tax Considerations for Creating an Estate Plan
Here are non-tax related reasons to consider creating or revising your estate plan:

  • Planning for children, grandchildren, or other loved ones
  • Planning for marriage, planning for disability or incompetency
  • Business succession planning
  • Planning for individuals with disabilities
  • Providing special protections for loved ones with poor money management skills
  • Identifying guardians for minor children
  • Identifying health care agents
  • Giving guidance on your healthcare wishes

If you have questions regarding your current estate plan or need assistance creating one, please contact Henson Efron.

The purpose of this article is merely to provide general information on some of the changes of the new tax legislation and may not be construed as legal advice.

Christopher Burns
My clients receive my undivided attention. I focus on learning your story and understanding your specific needs. With a broad base of legal knowledge, I will thoughtfully consider your issues, identify your options, and strategically use the right tools to accomplish your goals. With nearly 20 years of experience, I bring considerable expertise in the following areas: estate planning: planning and preparation of wills, revocable trusts, health care directives, financial powers of attorney, beneficiary designations for life insurance, and retirement plans estate and trust administration litigation of contested probate, trust,...
Stephen Hopkins
As a tax lawyer with more than 30 years of experience, I bring abstract thinking and critical analysis to uniquely solve problems. Keenly understanding the intricacies of tax law, I advise clients on what is possible and develop a game plan to tackle their issues. I represent individuals, businesses, and nonprofit organizations on all major areas of tax. I am proactive to help you avoid problems and costly mistakes, or mitigate damages when you are involved in a conflict. My expertise includes: advising about tax structure and identifying tax risks...
Maria Pitner
Truly understanding my clients’ needs and objectives are key to the development of a strategic and meaningful plan, and fostering a relationship they can trust for the long term. From creating an effective estate plan to helping clients navigate estate and trust administration matters, I assist with: preparation of wills and trusts, healthcare directives, and powers of attorney drafting trusts for minors, charitable trusts, and special needs and supplemental trusts business succession planning state and federal gift and estate tax law guardianship/conservatorship elder law The estate planning process is inherently...