How Can Recent Tax Law Changes Affect My California Estate Plan?
The recent changes in tax laws have significantly impacted estate planning in California. The Tax Cuts and Jobs Act (TCJA) of 2017, for instance, doubled the federal estate tax exemption amount. This means that an individual can now leave an estate worth up to $11.7 million to their heirs without incurring federal estate tax. For couples, this exemption is effectively doubled to $23.4 million. However, it’s important to note that this increased exemption is set to expire in 2025, reverting back to the previous limit of $5.49 million per individual, unless Congress decides to extend it. This temporary increase in the federal estate tax exemption has created a window of opportunity for estate planning, but it also introduces uncertainty.
What Does the California Estate Tax Look Like After These Changes?
While the federal estate tax exemption has increased, California does not have a state-level estate tax.
This means that regardless of the size of your estate, it will not be subject to California estate tax.
However, it’s important to remember that this does not exempt you from federal estate tax. Moreover, California does have an inheritance tax, which is a tax on the recipients of gifts or inheritances, not the estate itself. The state also imposes a gift tax on certain transfers of property during a person’s lifetime. These taxes can have significant implications for your estate plan.
How Do These Tax Law Changes Affect Certain Trusts More Than Others?
Trusts and wills are essential components of an estate plan, and changes in tax laws can significantly impact them. For instance, the increased federal estate tax exemption might make certain types of trusts, such as bypass trusts, less necessary for some people. However, these trusts can still offer benefits beyond tax savings, such as asset protection and control over asset distribution.
How Can I Adapt My Estate Plan to These Tax Law Changes?
Given these changes, it’s crucial to review and potentially update your estate plan. One strategy to consider is making use of the increased federal estate tax exemption while it’s available. This could involve transferring assets into a trust or making gifts to reduce the size of your estate. However, it’s important to remember that estate planning is not just about tax. It’s also about ensuring that your assets are distributed based on your wishes and that your loved ones are taken care of. Therefore, any changes to your estate plan should be made in consultation with an experienced estate planning attorney.
What Are Some Other Considerations?
Beyond the federal estate tax exemption, there are other tax law changes that could impact your estate plan. For instance, the TCJA also increased the annual gift tax exclusion, which is the amount you can give to any individual each year without incurring gift tax. In 2021, this amount is $15,000 per recipient, or $30,000 for a married couple. Finally, it’s worth noting that California is a community property state. This means that assets acquired during a marriage are generally considered jointly owned by both spouses. This can have implications for your estate plan, particularly if you have a large estate or if you’re considering divorce.
- Property Out-of-State: If you own property outside of California, it’s important to consider how this could impact your estate plan. Different states have different estate and inheritance tax laws, and these could potentially apply to your out-of-state property.
- Charitable Giving: Charitable giving is a common component of many estate plans, and the recent tax law changes could impact this aspect as well. The TCJA has increased the limit on cash donations that you can deduct from your federal income tax. Previously, you could deduct cash donations up to 50% of your adjusted gross income (AGI), but now you can deduct up to 60% of your AGI.
- High Net Worth: If you have a high net worth, the recent tax law changes could have significant implications for your estate plan. The increased federal estate tax exemption could potentially save you millions in estate taxes. However, this increased exemption is set to expire in 2025, which introduces a degree of uncertainty into your estate planning.
- Business Succession Plans: If you own a business, the recent tax law changes could also impact your business succession plan. The TCJA has made significant changes to the tax treatment of business assets, which could affect how you plan to pass your business on to your heirs.
- Blended Families: If you have a blended family, the recent tax law changes could also impact your estate plan. The increased federal estate tax exemption could potentially allow you to leave more to your heirs without incurring estate tax. However, it’s important to remember that estate planning in a blended family can be complex, and it’s crucial to ensure that your estate plan reflects your wishes and provides for all of your loved ones.
What Role Can a Lawyer Play in Adapting My Estate Plan?
An experienced estate planning attorney can provide invaluable guidance in navigating these recent tax law changes. They can help you understand the implications of these changes for your specific situation and suggest strategies to minimize your tax liability. Moreover, an attorney can help you navigate the complex rules around California’s inheritance and gift taxes. They can help you understand when these taxes apply and how to minimize them.
The recent tax law changes have significant implications for estate planning in California. By working with an experienced attorney, you can navigate these changes and ensure that your estate plan is tailored to your specific needs. If you need assistance with your estate plan, call the Singh Law Firm today at 510-901-5375 or 818-658-2174 for a free case evaluation!
