Why Estate Planning is Still Important in Light of the Tax Cuts and Jobs Act

Last week, we covered some of the important provisions in the Tax Cuts and Jobs Act passed by the U.S. House of Representatives and Senate.  Under the House and Senate versions, the individual estate tax exemption amount is doubled to $10.98 million in 2018, and the House version would completely repeal the estate tax for individuals dying after 2023.  Because this means married couples can effectively leave up to $22 million to beneficiaries tax-free, you may believe estate planning is no longer necessary.  However, estate planning is still important to ensure your assets are properly managed, and here are a few reasons why:

• Federal Income Tax Remains Under the Law: Income taxation affects potential beneficiaries and heirs to your estate.  Upon death, your assets’ basis is “stepped-up”.  The step-up basis of assets that occurs is an important tax planning technique that affects beneficiaries’ income.  In order to ensure your beneficiaries are not negatively impacted by the step-up basis, proper estate planning is required.

• Planning for potential disabilities or illness: There may come a time where you become disabled or fall ill. It is best to put documents in place, such as a power of attorney, in advance of such circumstances. Further, you may lack the required mental capacity to appoint persons to handle your affairs in the future. If a valid power of attorney does not exist, a court may appoint a legal guardian to control your assets, who may mismanage your affairs or may not act in your best interest.

• Asset Protection and Control: Asset protection is another important reason to consider implementing an estate plan. The use of a last will & testament and trusts allow you to maintain control of your assets for future generations to enjoy.

ο  Transferring assets outright to your beneficiaries allows them to take direct ownership of the assets, which exposes the assets to creditors, divorcing spouses, as well as bad decisions of those beneficiaries. Placing the assets into a trust, however, does not allow the beneficiaries to unilaterally draw down on the assets for their own desires (e.g., extravagant purchases, gambling, addictions). Further, the trusts generally provide protection from the beneficiaries’ creditors and divorcing spouses. Moreover, if properly structured, the assets can be placed in a trust that is domiciled in a state that affords asset protection benefits against your creditors.

ο  While providing these protections, trusts typically are structured to provide the beneficiaries to access funds for lifetime needs (e.g., health, education, maintenance, support) upon the approval of a trustee. Additionally, a trust may allow for distributions outright to the beneficiaries when they reach an appropriate age or circumstance (e.g., lack of creditors, existence of prenuptial agreement, no addictive behavior)

• Protecting Familial Relationships: Estate planning decisions can cause some hard feelings within families.  Careful thought and consideration must be given to how your assets are transferred, and having a discussion with family members about wealth-planning decisions often leads to better outcomes.  An experienced estate planner can offer their advice and expertise, ultimately making sure your assets are transferred smoothly.