It is that dreaded time of year again when you drop off that pile of paperwork with your accountant and anxiously await the outcome of your tax return. Our accountant friends have been busy doing double duty working hard to digest and understand the new tax legislation that President Trump signed into law effective January 1, 2018. Regardless of your political leanings, you just want to know in short, how does this impact me. Since I’m not an accountant, I cannot speak to the specific changes in deductions and credits. I would strongly encourage you to meet with your accountant and see what kind of planning is needed for you and your family in 2018.
In general though the Tax Cuts and Jobs Act of 2017 (“TCJA”) reduces individual and corporate tax rates and eliminates a variety of deductions and credits. In my world of estate planning the TCJA did NOT repeal the federal gift and estate tax, it does however, temporarily double the combined gift and estate tax exemption and the generation-skipping transfer tax exemption until 2026. This creates new estate planning challenges and opportunities. Under federal law now, the gift and estate tax exemption is $11.2 million for an individual and $22.4 million for a married couple in 2018.
Families with larger estates are going to want to look to strategies to lock in those higher exemption amounts to avoid future transfer taxes. Lifetime gifting is one of those strategies. Another option is the use of an irrevocable trust to allow the substantial transfer of assets out of your estate to that trust to grow over your lifetime and pass to grandchildren and future generations.
Another change with the new law is the expansion of the 529 college savings plan. A 529 plan is a savings plan designed to encourage saving for future college costs. Generally the growth/appreciation in value will be tax free as long as the money in that plan is used for qualified educational expense. When you make contributions to a 529 college savings plan, the contribution will remove the asset from your estate and you still retain the right to change beneficiaries. Under the TCJA, tax free distributions from the 529 plan can now be used for elementary and secondary school expenses, not just higher education expenses making this tool even more helpful to move dollars out of your estate.
The above is just a quick glance at TCJA, don’t forget Minnesota has its own state laws and limits that need to be factored into your estate plan. Just to refresh Minnesota is one of a handful of states that assess a tax on your estate when you pass away if certain limits are met. This type of tax is often referred to as a death tax and is assessed against the entire value of your estate. Currently, under Minnesota law an estate tax may be assessed if your total estate is over $2,400,000 in 2018, $2,700,000 in 2019 and $3,000,000 for 2020 and later.
Even though your estate may be nowhere near those limits, don’t get complacent. There are still a lot of non-tax reasons to complete an estate plan. You should name a guardian for your minor children, name an agent to act for you under a financial power of attorney if you are incapacitated or name someone to make health care decisions for you if you are unable. Don’t forget about establishing a business succession plan or establishing a plan to help a family member who has special needs.
Please send me an email at rene@breenandperson.com with any topic suggestions or requests you may have. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.