New tax reform laws will be effective for the 2018 tax season. Estate planning is impacted, but will revert to the prior rules after 2025. It is wise for anyone with an estate plan or will to review documents to ensure they continue to carry out your intent. Net worth changes, children may marry or divorce, and you may have grandchildren to add to the plan. Your wishes may change. Today, it may be better to consider estate and income tax planning together.
• The new tax law passed in 2017 approximately doubles the federal estate tax exemption to about $11.2 million per person. This new higher exemption will phase out in 2026, returning to $5 million, adjusted for inflation. And that might change sooner. This may be something you don’t have to worry about, but there’s more to the whole new tax
• Some state estate tax exemptions are below the federal exemption level. Arizona is one of 33 states with no estate tax or inheritance tax, according to the Kiplinger Report. Arizona has a mixed picture when it comes to taxes on retirees. The State of Arizona does not tax Social Security benefits. But, do you need the creditor protection of a trust? If you wind up spending down assets in long-term care, will there be nothing for your heirs?
• The new law sets a $10,000 annual limit on state and local income and property tax deductions. Property can be placed in a limited liability company and interests transferred to “non-grantor” trusts, which in turn can each qualify for that $10,000 exemption. Trusts established in states that have no income tax, such as Alaska, protect property from creditors.
• Since the new law boosted the standard deduction for charitable contributions from $6,350 to $10,000, you may get no tax benefit from donations if you don’t have enough to itemize. Arizona Tax Credit donations made after Aug. 23, 2018, are no longer eligible for federal tax deduction.
• A steep increase in new federal exemption amounts makes a review of existing wills and trusts one urgent action item. The new law also provides new estate-planning methods to save on income tax. It does not, however, include creditor protection, elder financial abuse defense, or maximizing bequests.
If your estate plans and wills were signed and sealed in 2001, the estate-tax exemption was $675,000. If you stipulated that the maximum would pass tax-free to your children and the balance would go to your spouse, now your children could receive $11.2 million, the new maximum, and there may be no balance remaining for the surviving spouse, resulting in “disinheritance.”
Under older planning tactics, “credit shelter” or “bypass” trusts would pay a surviving spouse and pass assets to your children in the end. Introduced in 2011, “portability” permits the surviving spouse to use any estate-tax exemption the first deceased spouse did not use. Beneficiaries inheriting assets from such trusts now miss a significant tax break. Now, assets such as stock and real estate are “stepped up” in basis to market value the day the owner dies. Heirs only pay tax on appreciation after that.
Extracted from Kiplinger’s Retirement Report