Estate Planning After the Tax Cuts and Jobs Act of 2017: A Review Needed?
Many clients who had taxable estates in 2017 (more than $11 million for a married couple) or even 2009 (more than $7 million for a married couple) now no longer have taxable estates, thanks to the Tax Cuts and Jobs Act of 2017 (the “Act”). What does that mean for you and what action do you need to take?
What is new?
The Act essentially doubles the estate and gift tax (and generation-skipping transfer tax) exemption amount to $11.18 million per person and is subject to inflation adjustments annually. A married couple can now transfer up to $22.36 million in 2018 to their family or other beneficiaries without estate or gift tax.
How might this affect an existing will or revocable trust?
If your documents were designed to minimize the federal estate tax – for example, they contain provisions for a “family trust” or a “credit shelter trust” – and you are not likely to have a taxable estate due to the increased exemption, you should consider having your documents reviewed and updated, especially if you live in a state that has no state estate tax. New York and Connecticut continue to have an estate tax with much lower estate tax exemptions. Georgia, Florida, and California have no estate tax.
A plan to minimize estate tax where no tax is due may be inefficient for income tax purposes. At death, your assets receive a “step-up” in basis, e.g., all that capital gain in your home you bought 30 years ago is wiped away and your heirs receive a basis in the home equal to its fair market value at your death. With no estate tax to worry about, the focus of your estate plan can shift to income tax planning and beneficiary protection, i.e., protecting beneficiaries from themselves and their creditors (including former spouses).
How else can the increased exemption affect your goals?
Due to the increased exemption, your current estate plan may no longer accomplish your goals. For example, a will that leaves your exemption amount to your children and the remainder of your estate to your spouse could result in your entire estate passing to your children.
To further complicate matters, the increased exemption is scheduled to expire on January 1, 2026, so providing for flexibility in your estate planning documents is crucial. Do your beneficiaries a big favor: have your documents reviewed and updated to make sure they continue to meet your estate planning goals.
Finally, consider using some of the increased exemption during your lifetime to save estate tax should it revert to a lower amount in 2026. Spouses are able to make transfers in a way that would allow each of them to potentially have access to the transferred assets.
Laura Wartner is a Partner in and Head of Smith, Gambrell & Russell’s Tax Practice, with a focus in Private Wealth Services on family business planning, estate planning and probate administration.