The Tax Cuts and Jobs Act of 2017 made a number of changes to U.S. tax law that will have effects on the way that individual taxpayer and corporations are taxed on income. Many individual taxpayers, particularly those who are currently engaged in estate planning or are thinking about making estate plans, might be wondering how the Tax Cuts and Jobs Act could affect their planning strategies.

As of Jan. 1, 2018, the Tax Cuts and Jobs Act has increased the federal estate, gift, and generation-skipping transfer tax exemptions to $10 million, indexed for inflation, per person, or $20 million for married couples with proper planning. The inflation-adjusted exemption amounts are expected to be $11.2 million for individuals and $22.4 million for married couples in 2018.

Although the possibility of estate tax liability might seem improbable or remote for some individuals and families, it’s still important to consider how new tax changes may impact estate planning.  Estate lawyer Konrad Malik explains, “[The new tax reform] ... eliminates some of the complexity and takes away a few of the obstacles that have been associated with estate planning in the past.”

The exemptions in the Tax Cuts and Jobs Act are due to sunset on Jan. 1, 2026, and there is a possibility that a future Congress could make changes to the law or repeal it. “The advent of the new tax laws provides an occasion for individuals to review their existing estate plans or to investigate how they can take full advantage of the opportunities created by the new tax laws,” Konrad Malik adds.  He also notes that the new exemptions establish different or better methods for individuals to make plans to shield wealth from taxation.

Individuals might choose to make additional tax-free lifetime gifts and thereby protect that wealth from taxation, even in the case that lower-level exemptions end up being reinstated.

Now may also be an ideal time to establish dynasty trusts. These types of trusts are irrevocable and allow for significant wealth to grow and compound free from federal gift, estate, and generation-skipping transfer taxes, which means that the trusts can provide tax-free benefits for grandchildren, great-grandchildren, and future generations as well. The duration of dynasty trusts can vary by state, with many states allow the trusts to exist for hundreds of years or in perpetuity.

Expansion of benefits associated with 529 college savings plans

Contributions to 529 plans are removed from an individual’s estate, even though he or she retains the right to change the beneficiaries or get money back from the plan. Tax-free distributions from 529 plans, as of 2018, can be used to pay for elementary and secondary school expenses, whereas under previous law distributions could only be used for higher-education expenses.

Published by Kaushal Shah