The latest tax reform made sweeping changes to the U.S. Tax Code. Learn more about what these changes may mean for estate planning.
On December 22, 2017, President Trump signed the Tax Cut and Jobs Act (TCJA) into law. The TCJA provides the most comprehensive reform of the United States Tax Code in over 30 years. One significant area impacted by the new law is estate planning, where reforms could have major implications for wealth passed between generations.
The Law Provided an Exemption but Not a Repeal
While many Republican lawmakers sought an outright repeal of the estate tax, the final legislation included only a doubling of the exemption. For estates and gifts, the tax exemption amount increases from $10 million to $20 million. This doubling of the exemption means that roughly 60 percent of American households formerly subject to the estate tax are now likely exempt. It is important to note, however, that the exemption decreases back down to pre-TCJA levels in 2026. Estate planning needs to take this sunset provision into account, possibly by taking advantage of this 10-year window with gifts made during someone’s lifetime (inter vivos) rather than after their death.
The Difference in the Consumer Price Indices
Tax exemptions are indexed to inflation to allow the amount exempted to reflect a similar value, in terms of buying power, from decade to decade. The previous law used the standard Consumer Price Index (CPI) to benchmark inflation, but the new law uses the chained CPI, which has the effect of moderating inflation. While this will not make a big difference year to year, it could require reevaluating assumptions under old estate plans, especially for people in their 50s and 60s who can expect to live for many more years.
Change to the “Kiddie” Tax
In the past, a popular way to avoid taxation on income-producing assets like stocks, bonds, and other investment products was to put the transfer ownership of the asset to a child, thereby taking advantage of the child’s lower tax rate. The Kiddie tax mostly put a stop to that by taxing unearned income of kids under 18 at their parents’ marginal rate. The TCJA makes this income shifting even less attractive by putting unearned income of minors into the tax bracket used for trusts and estates. In most cases, this is higher than the parents’ income bracket, meaning investments held by minors will be taxed at a higher rate.
The impacts of the TCJA are not limited to the realm of estate planning. The law will also affect corporations, especially small businesses. The assistance of an attorney knowledgeable about the ins and outs of this new law can be vital for individuals, families, and businesses seeking to navigate the changing legal landscape. The professionals at the Law Offices of Tyler Q. Dahl specialize in trusts and estates, business and corporate law, and more. Give us a call at 916-545-2790 to speak with an experienced professional about your legal needs.