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Higher exemptions with federal tax reform law

Pennsylvania residents should be aware of how the Tax Cuts and Jobs Act will affect their estate plans. The legislation allows individuals a short-term opportunity to reallocate a substantial amount of money without being assessed federal estate, generation-skipping transfer or gift taxes.

Beginning on Jan. 1, 2018, the exemptions for the estate, estate and gift taxes were doubled. Single individuals are able to transfer up to $11,180,000 without taxation while married couples are allowed to transfer up to $22,360,000. The exemption amounts also account for annual inflation increases.

However, taxpayers will only have until Jan. 1, 2026, to take advantage of the exemption increases. The exemptions will then return to what they were for 2017: $10,980,000 for married couples and $5,490,000 for single individuals.

It is expected that additional modifications will be made to the legislation between now and the sunset date. Taxpayers should begin now to establish planning strategies to take advantage of the higher exemptions before 2026.

Taxpayers may want to use trusts as part of their gifting strategy. Assets that are gifted directly to the beneficiary are at risk of being claimed by creditors the beneficiary may owe. However, if the assets are placed in a trust, they are protected from the beneficiaries' creditors and spouses in divorce. Using a trust to manage gifts also allows the grantor to specify how the assets should be used and shields the gifted assets from estate, GST and gift taxes through use of the GST exemption.

An attorney who practices estate planning law may consider the assets and financial goals of a client and advise what strategies should be implemented to best take advantage of the increased exemptions for gift, GST and estate taxes. The attorney may recommend using certain trusts or wills as gifting tools.

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