How Has Tax Reform Affected Estate Taxes?

March 13, 2018 — While the recent tax overhaul bill was extensive, and at times difficult to parse through, the provisions regarding estate tax were fairly uncomplicated and taxpayer-friendly. How has the Tax Cuts and Jobs Act affected Estate Taxes?

The new lifetime exemption, or the number of assets you can transfer during your life or at your death, has increased to $11,180,000 as of January 1st, 2018. This is nearly double what each taxpayer had on December 31st, 2017.

The generation-skipping transfer tax exemption also increased to this level. This amount will also continue to increase annually based upon a chained-inflationary adjustment. The annual exclusion gifting rules have remained unchanged.

The amount you can gift annually increased from $14,000 to $15,000 for 2018, but the same exceptions for medical, educational, and spousal gifts remain. Another provision in the old law that remains is portability. Portability allows the first deceased spouse to transfer any of their unused exemption to the surviving spouse. The survivor can then use that during their life or at their death to transfer assets tax-free.

When portability was first introduced several years ago it was a game changer and will continue to be a major factor in married couples’ plans.

You may be asking yourself—with the increased lifetime exemption, why you should care about planning for the estate tax? Below are several reasons why your estate planning documents should not be left to collect dust.

Why Revisit Your Estate Planning Documents?

First, unlike death and taxes, the increased exemptions are not certain. The new law sunsets back to old exemption levels on January 1st, 2026. The biggest unanswered question surrounding the sunset provision is what happens to taxpayers who use the increased exemption.

• Will there be a clawback when you pass away? Meaning, if you utilized the additional exemption and pass away after the sunset date, would the IRS pull those additional assets back into your estate?
• If your estate is subject to a state estate tax how does a potential clawback affect your taxable estate on the local level?
• Would clawbacked assets get a step-up?

A clawback of this type would likely be ruled unconstitutional; however, it is something to stay mindful of when considering using the additional exemption for lifetime gifting.

Second, the new tax law also preserved the “step-up” in basis. When assets pass through your estate, your heirs receive an increase to the assets’ basis. This means when your heirs sell the assets their gain is generally minimized.

For example, let’s say you own 3M stock valued at $150 per share, but your basis is $1. If you sell 1 share you will pay capital gains tax on $149. If you transfer shares during your lifetime, the person receiving the shares will take your basis – the $1. If the shares transfer to your heirs via your estate, then their basis is $150.

Depending on your situation, keeping assets in your estate might be a better answer then transferring during life. Of course, everyone’s asset mix, overall estate plan, and goals are different, so consulting with your advisors is critical in determining how best to maximize tax efficiency and achieve your goals.

Third, many Revocable Living Trusts and/or Wills have the option to fund a family trust up to the federal exemption level. When the exemption was $5,490,000 this might have still made sense. However, now that the exemption has doubled, it is worth taking another look to ensure that planning is still in yours and your family’s best interests.

Furthermore, revisiting existing irrevocable trusts may also be fruitful. There may be planning opportunities to transfer assets back into your estate to take advantage of a step-up and the higher exemptions.

Lastly, if you are a Minnesota resident or a resident of one of the thirteen other states that impose their own estate tax, then it is worthwhile to review your estate plan on a periodic basis to ensure it is reflective of current law.

In 2018, Minnesota’s exemption is $2,400,000 – well below the Federal exemption. As the discrepancy is so large, planning is critical to ensure your assets are transferred tax-efficiently and fully utilize both state and federal exemptions.

Even though the new estate tax exemption will result in fewer taxpayers paying estate tax at the Federal level, there are still a multitude of reasons to not be passive when it comes to your planning. Working with your trust advisors will help to ensure that you take full advantage of the new law, and preserve your wealth for your family and generations to come.

Would you like to discuss estate, gift-tax, or trust concerns? Contact Gloria McDonnell today.