Opportunities in Estate Planning Under New Tax Law

Opportunities in Estate Planning Under New Tax Law

by Richard S. Bernstein on Apr 6, 2018

Estate Planning

The Tax Cuts and Jobs Act has delivered significant estate planning opportunities, but many families have not taken advantage of these changes. Whether it’s the change in estate tax exposure, the generation skipping tax, or general long-term estate planning, anyone interested in transferring wealth should be aware of how the new tax bill affects estate planning. This article will mention some of the changes in the tax bill that have the most noteworthy impacts on estate planning.


Estate Tax Exposure

A common misconception about the tax bill is that it has eliminated the estate tax altogether. The reality is that the exemption has been doubled from a $5 million to an $11.2 million (indexed for inflation) exemption. Additionally, this exemption is not permanent, and will end in 2026, reverting to the original exemption. It’s key that anyone serious about their estate planning note this, as any estate planning should be done sooner than later to take advantage of this change. The tax exposure for non-resident aliens with US situs assets has not changed. Lastly, the ultra-affluent still have significant estate tax exposure due to the amount of assets they own.  These individuals require significant liquidity at time of passing to pay the estate tax, and should plan accordingly.


Generation Skipping Tax

The tax bill also has implications for Generation Skipping Tax (GST) planning.  Parties should increase the exemption amounts on old trusts so that they appropriately match new limits. The formulas used to calculate benefits for loved ones may no longer be appropriate and may even lead to unintentional allocation of funds at time of passing. Old trusts should be decanted into new dynasty trusts that use the increased GST exemption in pursuit of a zero inclusion ratio. Those looking to maximize their long-term wealth transfers should leverage life insurance on the senior and junior generations.


Long-term Estate Planning Objectives

Individuals that wish to transfer wealth via Irrevocable Life Insurance Trusts (ILITs) and dynasty trusts should do so now before exemptions return to pre-tax bill levels. The exemption could go even lower after 2026, and if the opportunity isn’t taken now, it may be gone forever. For those who are hesitant, one may want to consider a split-dollar approach, as this provides more flexibility in planning.


Designing a sophisticated and properly structured estate plan can take time. Consider developing one now to take advantage of the new tax law. The window of opportunity has opened and letting it close would be a mistake for an estate plan.


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