Does the Tax Cuts and Job Act Affect your Estate Plan?

On December 22, 2017, the Tax Cuts and Job Act was signed by President Trump, signaling a sweeping legislative reform of the federal tax code. In November, we discussed how the new tax bill would affect pass-through entities, so now we will turn our attention to portions of the bill that specifically affect estate planning. 

Federal v. State Estate Tax

When discussing estate taxes, it is important to keep in mind that there are both federal and state estate tax rates just as there are federal and state income taxes. The rates are set independently from one another by congress and the state legislature. Because the Tax Cuts and Job Act was a federal bill, the changes discussed below are only applicable to the federal estate tax.

Why am I placing such a heavy emphasis on state versus federal estate tax? The Oregon state estate tax exemption is still set at $1 million, and does not allow for portability of a deceased spouse’s exemption at the death of a surviving spouse. Many of our estate planning clients have a net worth over the state exemption limit, but under the federal exemption. For these clients, the primary goal in setting up an estate plan is to avoid state estate taxes, not federal.

Prior to the new tax plan, individuals with a net worth over $ 5.49 million would face paying both federal and state estate taxes without an estate plan. Planning for such an individual was generally focused on avoiding the federal estate tax rate of 40% versus the much lower state estate tax rate of 10-16%. With the new tax bill substantially raising the federal exemption, higher net worth clients may want to adjust their estate plan to focus on avoiding the state tax.

What’s Changed?

The federal estate tax exemption has been doubled from $5 million (indexed for inflation), putting the individual estate tax exemption at approximately $11.2 million (congress has not released the exact figure for 2018 as it will be indexed for inflation). The federal tax still allows for portability, meaning that if a portability election is made at the

death of the first spouse, the surviving spouse would be able to pass on approximately $22.4 million tax-free at their death. In light of these new exemption limits, very few individuals will have to worry about the federal estate tax.

It is important to note that like the Bush era changes to the estate tax, the 2017 changes have a sunset provision for 2026. This means that unless congress passes another law to make the exemption limits more permanent, they will go back to the $5 million exemption limit in 2026.

At the moment there is a lot of speculation as to whether congress would repeat its course from the Bush era, and permanently instate the higher federal exemptions, or whether midterm elections will cause a shift in congress that will pull back down the exemptions. However, at the state level, it seems unlikely that Oregon will increase the state estate tax exemption any time soon.

While it may seem tempting to prepare an estate plan and never revisit it’s contents, we always suggest that our clients do a periodic review of their plan to make sure it continues to best achieve their estate planning goals. If you’d like to discuss a new or existing estate plan with one of our attorneys, please contact our office by clicking here.