Whether the new tax laws affect your estate plan depends largely upon the size of your estate. Federal estate taxes are due after someone dies when their estate is valued over the exempt amount. Before the latest round of tax reforms, the exemption was $5.49 million. As things currently stand, that exemption will return at midnight on December 31, 2025, although the new exemption will be adjusted for inflation.
For now, the exemption is double, at 11.4 million dollars. For individuals whose estates exceed the exemption, estate taxes impose a significant burden of a 40% tax on the assets that exceed the exemption.
There are numerous ways to avoid some or all of the estate taxes that will be due without planning. Legally minimizing estate taxes can be complex, and it is best to enlist the services of individuals with experience in estate planning to assist you. One key point is that planning should occur before death. Once someone passes, the strategies to minimize estate tax are limited.
In this article, we will take a look at the new tax laws that came into effect in December 2017 and how they could affect your estate plan. After reading, you may want to consider contacting an estate planning attorney to get more in-depth advice on your specific circumstances.
Changes Under Tax Reform?
First, you should know that the estate tax limit is the value of the estate that is exempt from the taxable estate. It is a Basic Exclusion Amount that includes the value of the estate at the time of death and gifts made during the lifetime of the decedent if the gifts exceeded the annual gift tax exclusion.
Currently, a single person can give an unlimited number of people $15,000 each year. A married couple can give up to $30,000 per person. Gifts of $15,000 per donor may also be made to a Crummey trust. Crummey trusts generally own life insurance and annual gifts are used to pay the premiums on the life insurance. The purpose of the life insurance held in a Crummey trust is often to pay estate taxes. For example, an estate where the majority of the value is derived from real estate or a closely held business could use a Crummey trust arrangement to pay estate taxes and avoid having to liquidate assets to pay taxes.
Even if the life insurance is not needed to pay estate taxes during this temporary period with an increased exemption, canceling the insurance might not be the best plan since it might be impossible or more expensive to replace after 2025 if the insured’s health deteriorates.
Since the current exemption from estate taxes is $11.2 million per person but the amount is scheduled to drop back to an inflation-adjusted $5.49 million in 2026, the question of “What happens if someone uses the exemption for lifetime gifts and dies after the end of 2025?” has been a concern. Recent IRS guidance has clarified that the higher exemption will apply to lifetime gifts and generation-skipping transfer taxes. The higher of the exemption in effect at the time of the gift or at the time of death will apply.
That’s good news for wealthy clients. They can gift assets over $5.49 million up to $11.2 million and avoid the 40% estate tax on all of them between now and the end of 2025. Married couples can gift up to 22.4 million dollars.
It is important to remember that gifts made during the life of an individual transfer with the current owner’s basis in the property while inherited assets transfer with a stepped-up basis. This makes the decision about which assets to gift more complicated for those who wish to minimize their tax liabilities.
How does tax reform impact state estate tax?
For citizens of many states, and especially high-tax states such as New York, Connecticut, Delaware, Massachusetts, and others, the higher estate tax exemptions combined with the availability of states like Nevada that do not impose estate or inheritance taxes, relocating to a state with more favorable estate taxes may be a wise financial move.
How often should an estate plan be reviewed?
Estate plans should be reviewed when the family experiences events including births, marriages, adoptions, divorces, deaths, and when the tax laws change. Beyond that, a periodic review should also be done when any assets specifically named in the estate plan change ownership or if the individual wishes to make changes. If none of those events occur, it is still a good idea to review the documents periodically.
One example of why it is important to review the estate plan after tax law changes are to avoid accidentally disinheriting an intended heir. Many estates use a bypass trust with any unused portion of the exemption. For example, giving the children assets that exceed the exemption and the spouse the remainder. If an estate is worth $10 million, this set-up would currently disinherit the spouse.
If your family has celebrated any births, marriages, or adoptions or experienced any deaths or divorces since your estate was last reviewed, or if it hasn’t been reviewed since the latest tax changes in 2018, contact us to schedule a review.