Does The Tax Bill Affect My Estate Planning?

Just before Christmas, Congress passed House Reconciliation Bill 1—also known as the Tax Cuts and Jobs Act of 2017—the largest overhaul of the Federal tax system since Reagan's comprehensive 1986 reform. Many clients are now wondering how the changes might impact them, and whether the legislation might even make their current estate plans unnecessary. 

The tax bill’s primary impact on estate planning is a dramatic increase in the Federal estate and gift tax exclusion. Prior to the bill, the Federal estate tax exclusion for individuals dying in 2018 was set to be $5,600.000. In other words, anyone dying this year would have been able to pass $5.6M to their heirs, free of Federal estate tax. Though a wholesale repeal of the estate tax was proposed by some groups, Congress instead elected to retain the estate tax, but double the exclusion amount. Therefore, rather than the $5.6M exclusion that was previously on the books, an individual who dies in 2018 can now pass $11,200,000 free of Federal estate tax—or $22,400,000 for a married couple! The Federal gift tax exclusion has been similarly increased, and is also now also $11.2M per individual.  

On the other hand, Washington State’s estate tax is unchanged, and Washington’s exclusion is $2,193,000 for individuals dying in 2018. Therefore, though the tax bill potentially reduces or even eliminates Federal estate tax exposure for many individuals, effective planning to minimize Washington State estate tax remains a priority. Because the strategies historically used to address Federal estate taxes still apply to Washington State estate taxes going forward, we do not foresee a significant change in the basic structure of estate planning documents for most clients. 

Finally—and perhaps most importantly—the increase to the Federal estate tax and gift tax exclusion is not permanent. Unlike the reduction in the corporate income tax rate, the provisions relating to individual income taxes are set to expire and will revert to the old exclusion amounts in 2026 without further legislation. Therefore, it is still necessary to consider the old exclusion amounts when doing estate planning, because the lower exclusion amounts very well might return.

Because of the ongoing need to plan for Washington State estate taxes, and because of the potentially temporary nature of the new Federal estate tax exclusion amounts, we do not believe that the tax bill significantly impacts the need for estate planning. Additionally, a good estate plan also addresses specific needs and situations, appoints crucial fiduciaries, and most importantly provides security and certainty for families—and these concerns all remain despite the recent tax legislation.