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Estate Planning in 2017: Here's What You Need to Know

By Dan Caplinger – Jan 22, 2017 at 6:46AM

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Stay up to speed on how to plan your estate.

No one likes to do estate planning, but it's essential if you want to make sure that your assets go where you want them to go after your death. Each year, changes to gift and estate tax laws and other related provisions can affect your estate planning. Below, we'll look at the most important provisions that affect estate planning in 2017 with an eye toward guiding you to get your plan in shape.

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No change in the annual exclusion amount for gifts

The federal government's gift tax provisions theoretically apply to even the smallest of gifts. However, to avoid having everyone need to file gift tax returns, the tax laws provide for an annual exclusion that allows gifts up to a certain amount without having to pay tax or file a return. For 2017, that number once again stays at $14,000, the same as it has been for several years.

A couple of features of this annual exclusion are noteworthy. First, you can make $14,000 to as many different people as you want. So if your goal is to deplete your assets as quickly as possible, making annual gifts to children, grandchildren, and other relatives can be a good way to take money out of your taxable estate and effectively make sure that your loved ones get it rather than Uncle Sam.

Also, there are certain types of gifts that can exceed this amount without incurring tax. Most people can make unlimited gifts to their spouse, and money you spend on medical care or education for someone else isn't treated as a taxable gift if you pay the educational or medical institution directly.

Modest increase in the total exclusion amount for gift and estate tax

Even if you make gifts larger than the annual exclusion amount, you still typically won't have to pay tax right away. That's because the U.S. tax laws unify both the gift tax and the estate tax, providing for a single tax credit that allows people both to make taxable gifts during their lifetime and to transfer estate property to heirs free of tax up to a certain total amount. That amount climbs each year for inflation, and for 2017, the new amount will be $5.49 million. That's up by $40,000 from what it was in 2016.

It's true that this amount is high enough to prevent most people from having to think about federal estate tax. However, keep in mind that this amount includes not only the value of any assets you own, including real estate and investments, but also the death benefit on life insurance that you owned at your death. As a result, what looks like a smaller estate right now could actually be taxable once you consider all your included assets.

Gift and estate tax rates remain the same

The gift estate tax bracket structure is complex on its face, with nominal brackets that run all the way from 24% to 40%. However, because of the way that the unified gift and estate tax credit is structured, there's really just one rate in practice: the 40% rate. That tax rate is unchanged from where it has been for several years. Although that rate is higher than the highest income tax bracket, it's still less than the 55% estate tax rates that taxpayers saw in the not-so-distant past.

Couples can still double up on their lifetime exclusion amount
Until 2011, sophisticated estate planning was necessary to ensure that both spouses got the full benefit of their respective lifetime exclusion amount. However, since then, changes in estate tax law have created what's known as portability, allowing a surviving spouse to use any unused portion of the lifetime exclusion of the deceased spouse. This avoided forcing spouses to set up complicated trust structures to take advantage of the provision.

For 2017, portability will let couples transfer almost $11 million of taxable property to heirs without having to pay any estate tax. As long as the estate makes the appropriate election to take advantage of the provision, there's no reason not to do so, and the resulting gains can be significant.

Some state gift and estate tax laws will change as well

One thing to remember is that even though federal estate tax laws have changed dramatically in recent years, not all states have followed suit as quickly. For instance, more than a dozen states impose estate or inheritance taxes of their own, and their provisions don't necessarily dovetail with federal law. There has been a trend toward less draconian estate taxes at the state level, but they haven't disappeared entirely.

For instance, New Jersey has a lifetime exemption amount for 2016 of just $675,000, which makes it the highest-taxing state in the U.S. in terms of estate tax. However, for 2017, that exemption amount will go up to $2 million, and the tax will go away entirely beginning in 2018. Some other states have been steadily moving their exemption amounts higher, including Maryland and New York, but others show no signs of getting rid of their individual laws. Be sure to turn to your state's tax department to find out what estate taxes might apply.

Estate planning isn't anyone's favorite thing to do. But by being smart with your planning, you can make sure your loved ones get every penny they deserve of your assets.

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