New tax law offers opportunities to transition your wealth

by Thomas J. Taricani

New estate planning opportunities created by the Tax Cuts and Jobs Act of 2017 (TCJA) makes now the perfect time to consider a lifetime transfer of wealth to your heirs.
Even if you’ve recently updated your estate plan, you probably have to look at some updates to ensure you’re taking full advantage of TCJA’s new opportunities. The beneficial changes under the new tax law also hit at a convenient time: Baby Boomers ages 54 to 70 will transition enormous amounts of wealth in the next 15 years, including 60 percent of privately held businesses.

Two significant TCJA provisions impact how Baby Boomers prepare to transfer their estate and the wealth they have earned over a lifetime:

• Many businesses benefit from a 20 percent income tax cut on qualified business income.
• The individual federal estate exclusion doubled to $11.2 million for individuals and $22.4 million for married couples.

Depending on your circumstances, conferring some of your wealth as gifts during your lifetime may be more beneficial to your heirs than having everything transferred as part of your estate plan.

5 estate planning considerations for Baby Boomers

Comprehensive estate planning begins with a “Readiness Assessment” that examines the five following considerations:

1. I know the location of my key documents, understand what they call for and have recently reviewed terms with my decision makers.
2. My family and heirs understand what financial support they can expect in the event something happens to me.
3. I have reviewed my estate planning in light of TCJA and understand its impact.
4. My heirs are prepared to deal with the consequences and responsibilities of managing their inheritance, or arrangements are in place to assist.
5. I have made my philanthropic desires clear in my planning and/or my heirs understand my wishes.

If you answered “yes” to all the above, congratulations, you are on top of your affairs! If not, consider this a nudge to make one of your New Year’s resolutions to update your estate plan.

The new federal law has had little impact on Pennsylvania inheritance tax, which stands at 4.5 percent on transfers to lineal heirs, such as children and parents; 12 percent to nonlineal relatives, such as siblings and cousins; and 15 percent to nonrelatives. Unlike the federal tax code, there is no exclusion, so taxation generally begins with the first dollar.

Benefits of gifting and ‘stepping up’

The incentive to consider gifting a portion of your estate can be significant as opposed to allowing assets to pass through your estate.

For 2019, the new tax law keeps the annual exclusion amount for gifting at $15,000 annually and more than doubles the total allowable amount of gifts from $5 million to the exclusion amount of $11.4 million for an individual (or $22.8 million for couples). Generally, the exclusion not used during your lifetime can then be used a death.

Under TCJA, heirs will continue to benefit from the stepped-up in tax basis when inheriting qualified stocks, real estate, and other capital assets despite the increased exclusion. For tax purposes, these assets passing through a decedent’s estate are generally valued at the fair market price at the date of death – meaning heirs avoid paying income tax on the appreciation and can enjoy significant benefits under the new 20 percent income tax cut for qualified business income with the basis adjustment.

Pennsylvania’s one-year look back on completed gifts more than $3,000 has not changed. This essentially permits unlimited gifts if the benefactor lives one year from the date of the gift.

Therefore, estate and income tax planning need to focus on the benefits of utilizing the expanded lifetime gifting opportunities (getting future appreciation out of your estate) vs. the on-going benefits of the “step-up” as assets pass through a decedent’ estate.

Preserving wealth in perpetuity

Unfortunately, we have all observed heirs squander their inheritances because they are ill-equipped to handle their new responsibilities.

We spend a significant amount of time with high net worth families helping chart a course to increase the likelihood that heirs will perpetuate their family legacy. It is especially important for high net worth families to create a wealth transfer plan spelling out asset management and the disbursement of financial support. This is particularly true for surviving spouses who may remarry and bring a second “family” into the equation. We recommend integrating this legacy plan with your written estate plan and discussing it with your heirs. A “family council” meeting held while the parents are alive and able is a good way to start a collaborative communication. These meetings are often enlightening for the family on the responsibilities of wealth management and on-going expectations.

We also recommend a family philanthropy plan to ensure the senior generation’s charitable goals and objectives continue. Establishing a charitable foundation or family council that meets periodically and addresses the allocation of invested assets can provide a way for heirs to work together for a common goal and preserve a sense of a family mission.

Eight years … or two?

It’s important to remember that under TCJA, the increased estate exemption and the additional 20 percent tax deduction for pass-through income will sunset on Jan. 1, 2026. Whether these exemptions and deductions will continue will largely depend on who occupies the White House and controls the Legislature.

Why spend a lifetime accumulating significant wealth and not take advantage of every opportunity to ensure your heirs reap the maximum benefit from your hard work?

A CPA or financial professional can help assure your estate plan takes advantage of all the benefits under the Tax Cut and Jobs Act and increase the likelihood of a successful transition of wealth.

Thomas J. Taricani, CPA/ABV, CVA, CEPA, is a principal at Boyer & Ritter LLC, with more than 27 years of experience providing audit, accounting, tax and consulting services. His specializations include formulation and implementation of succession and estate plans, and preparation of business valuations of closely held businesses for use in succession, estate planning and various litigation engagements. Contact Tom at 814-234-6919 or ttaricani@cpabr.com