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The New Tax Reform: What Does It Mean For Your Estate Plan?

The New Tax Reform: What Does It Mean For Your Estate Plan?

The new tax bill President Trump signed into effect in late December provides some significant changes in the tax landscape. While all Americans, no matter what tax bracket, can expect changes to their taxes this year, there are a few key changes that relate to estate planning and family law.  

The Impact on Estate Planning – Changes to the Federal Exemption: 

The tax bill increases the federal exemption amount, which is the amount of money an individual can pass during life or at death before federal estate tax applies, to $11.2 million per person. For a married couple, this means that they can combine their exemption amounts to prevent federal estate tax from applying to the first $22.4 million of their estate. These higher exemption amounts are currently scheduled to sunset in 2026. Due to these large exemption amounts at the federal level, the practical effect of the bill is that federal estate tax will apply to fewer individuals. 
However, even if a person’s estate is under the federal estate tax threshold, there are still a number of planning opportunities worth reviewing to ensure the plan continues to function as efficiently as possible, such as:
  • State estate taxes - Oregon and Washington have a much lower exemption amount ($1 million and $2.193, respectively), which applies independent of the federal estate tax.  So, even if federal estate taxes are not an issue, there may be state estate taxes to account for;
  • Income taxes - The interplay between estate taxes and income taxes and how to minimize or eliminate capital gains on assets transferring at death; and
  • Lifetime gifting strategies – The annual gift tax exemption increased to allow individuals to gift up to $15,000 each year to any individual before gift tax issues apply.

The Impact on Family Law – the Deductibility of Spousal Support:

On the family law side of our practice, the most important change to the tax plan relates to the deductibility of spousal support. Under new law, the deductibility does not apply going forward to spousal support awards from Judgments of Legal Separation or Dissolution of Marriage that are not signed by a court prior to December 31, 2018.

Any judgment signed after that date would preclude parties from being able to deduct spousal support and it would not be included as income by the party receiving the support. The person paying support, who is generally at a much higher tax bracket, would pay taxes at their rate on all of their income and pay support from their net income. It would not be included as income by the party receiving the support.

Dependency Exemptions & Child Tax Credit: 

A second issue has to do with the dependency exemptions, which have been eliminated. Oregon follows federal law in that the parent who has more than 50% of the parenting time can claim the child as a dependent. Under the new tax law, the parent who claims the child as the dependent would be able to claim the associated tax credits, which have increased under the new plan.

In addition, the new plan also provides a higher income threshold before the tax credit is phased out. A party entitled to claim the child as a dependent can still allocate the child(ren) to the other non-custodial parent to claim as a dependent including the associated tax credits, as long as it is specified in the Judgment and form 8832 is signed by the custodial parent.

Corporate Tax Rates & Business Valuations: 

Finally, one of the other significant changes involves business valuations. The reduction to the corporate tax rates and potentially lower taxability of income from flow-through entities under the new tax plan may result in an increased value of a party’s business interest.

All of the changes referenced above are effective as of January 1, 2018, except for the change to spousal support, which was initially proposed to go into effect January 1, 2018, but was deferred to begin January 1, 2019. 

Authored by Gevurtz Menashe Family Law Shareholder, Zachary Fruchtengarten & Estate Planning Associate, Stefan Wolf