Amendments to the tax code can have a significant impact on estate planning. The Tax Cuts and Jobs Act passed in 2017, for example, included major changes that may help reduce or eliminate an estate’s taxable amount. The new tax code presents valuable opportunities when preparing for the future. Before exploring different estate planning options, it’s important to understand how the following modifications will affect plans moving forward.
What the New Tax Law Means for Estate Planning
Gift & Estate Tax Exemptions
The altered exemption amounts allowed for gifts and federal estate taxes represent the new tax code’s most relevant application for estate planning purposes. Until the year 2025, these exemptions are increased to $15,000 per recipient for gifts and from $5.49 million per person to approximately $11.2 million per person in estate taxes. This is how much a decedent can leave to their heirs without being taxed. You thus may be able to enhance your estate plans and protect more wealth for your beneficiaries. Any gifts over the limit will be taxed at 40%.
Life Insurance Uses
Life insurance may also have a new role due to the tax reform. Previously, planners often purchased life insurance as a way to cover estate taxes upon their passing. However, the increase in exemptions renders this unnecessary in many cases. Still, life insurance policies can still be useful as a savings vehicle and to help pay for everyday expenses upon a policyholder’s death. Additionally, the exemption changes are set to expire in 2026, which means you may once again need life insurance to pay estate taxes.
Historically, grantor trusts have been effective for leveraging the value of gifted property. This type of estate planning trust allows donors to pay the tax on the trust income, allowing the trust to grow tax-free and reducing their taxable estate. Now, you may want to consider setting up non-grantor trusts that are set up to pay your taxes as a separate entity.
In addition to providing new opportunities for those just beginning the estate planning process, the tax reform also means that estate plans that have already been created should also be revisited. An attorney from Zangari Cohn Cuthbertson Duhl & Grello P.C. in New Haven, CT, will help you develop a plan that serves your unique goals and that takes advantage of the tax efficiency offered by the current law. Having worked with New England residents since 1946, this firm is known for providing sound legal advice and expert guidance in all aspects of estate planning. Call (203) 789-0001 to schedule a consultation or visit them online for more information on the various services they offer.