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Effects of the New Tax Law on Estate Planning

Published January 29, 2018

The Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump on December 22, 2017. The new law will have significant effects on estate planning.

One major impact of the new law is on the gift and estate tax exemption. Previously, the exemption shielded the first $5 million in gifts during life or after death as part of one’s estate. The amount is indexed for inflation and was $5.49 million in 2017. There is an exemption from the generation-skipping transfer tax in the same amount. The TCJA doubles the exemption amounts to $10 million adjusted for inflation. Starting January 1, 2018, the exemption amount is $11.2 million, so a married couple can transfer $22.4 million without incurring gift or estate tax.

The new law includes a sunset provision for the increased exemption amount. The increase applies from 2018 through 2025. Starting January 1, 2026, the exemption amount will return to its previous level of $5 million adjusted for inflation.

Note that the New York State estate tax exemption amount remains unchanged. It is currently $5.25 million, and will rise to $5 million adjusted for inflation on January 1, 2019. From 2019 onward, the state exemption amount was intended to match the federal exemption amount, but from 2018 through 2025 it will be significantly lower due to the new federal law.

The TCJA brings other changes that may affect estate plans. The law includes an increase in the deductibility limit for cash donations to public charities, from 50 percent of the taxpayer’s adjusted gross income, to 60 percent. Business owners, including trusts and estates, may deduct 20 percent of “domestic qualified business income” from pass-through entities. Finally, the permitted uses of Section 529 education savings plans has been increased. Distributions up to $10,000 per student per year may be used tax-free for private and religious elementary and secondary schools.

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