Two things to know about the new tax law and your estate plan

The new tax law can impact your estate plan. Here's how.

There are certain events that should trigger a review of an estate plan. A change in the family structure through birth, death, marriage or divorce is one type of event that should trigger a review. A change in the law is another.

President Donald Trump recently made good on his promise to push forward tax reform with the Tax Cuts and Jobs Act (TCJA) signed into law in December of 2017. It is important to note that the change will impact more than just your tax returns. It could result in an unforeseen impact on your estate plan.

Two key changes that could impact your estate plan include:

  • Estate and gift tax exemption. The TCJA increased the estate and gift tax exemption from $5.6 million to $11.2 million. The government estimates the change will impact 5,000 estates. This could also impact estate plans that use formulaic provisions based on these limits. This can include estates that gift bequests to children "up to the exclusion amount" and the remainder to the surviving spouse. Depending on the size of the estate, the increased exemption amount may result in a surviving spouse that does not receive a bequest. Estates with these provisions should review how the new exemption rate impacts the provision and adjust as needed to better ensure the bequest are in line with your wishes.
  • Exemption limit for spouses. Congress revised the tax rules in 2012 to allow for portability of the exemption limit for couples. This change allows preservation of the exemption rate for each spouse even after one dies. In order to use this rule, documents within the estate plan must have specific language invoking portability. Without proper documentation, portability is lost.

It is important to note these changes reflect federal law, not state law. Massachusetts is one of few states that has a state estate tax law. Estates with a value at or above $1,000,000 will need to file an estate tax return and pay applicable tax obligations to the Massachusetts Department of Revenue.

Two words of caution: The law will sunset and the danger of boilerplate documents

The TCJA exemption limits will sunset in 2026. At that time, the exclusion rates and other changes will revert to the previous 2017 levels. As such, it would be wise to schedule another estate plan check-up at that time.

Vague or overly generally boilerplate documents can lead to unintended consequences. This can be avoided by having an estate plan that is crafted to your unique situation. An attorney experienced in this matters can help.