New Tax Law Mandates Review of Estate Plan

Estate tax exemptionThe new estate tax law allows a bit more than $11 million per person to be passed to children or other non-charitable heirs, free of federal gift or estate tax.

With aggressive techniques, a couple could use their combined $22 million tax exemption to transfer more than a quarter-billion of assets into an irrevocable dynasty trust. That way, your wealth can continue to grow and pass, estate-tax-free, to an unlimited number of future generations.

Ask your estate planning attorney about this.  You should also have him or her review your current estate plan for booby traps immediately. This is because you may need to redo or scrap your plan. It is especially important if you live in one of the 15 states that have estate and/or inheritance taxes at much lower levels of wealth than the federal government.

A common mistake is a will that establishes a trust linked to an outdated federal and/or state exemption amount. An old will that leaves the "exemption amount" in a trust for children from the first marriage and the rest to the current wife means the kids' trust would get everything and his wife nothing. In a state like New York, that exempts only $5.25 million from its own estate tax, accidentally leaving the rest to the kids will incur a large state estate-tax bill.

It would be easy to change the will or perhaps do not have any trusts because now there is the "portability" of exemptions between spouses. Prior to 2011, the wills of affluent couples typically created what's known as a "credit shelter" or "bypass" trust. When the first spouse (assume it's the husband) died, an amount equal to his estate-tax exemption went into a trust for his wife and kids. She would have access to trust income and, if necessary, principal.  However, his exemption wouldn't be wasted. When the wife died, the trust assets wouldn't be part of her estate. Now, with portability, any unused portion of the husband's exemption passes to his widow, provided the executor of the husband's estate files a tax return electing portability.

Avoiding capital gains tax may be a reason to skip a trust. When someone dies, the assets in his or her estate (including real estate, collectibles, stocks and mutual funds that aren't held in a retirement account) get a step-up in basis to their current value. That means heirs can sell immediately without owing capital gains tax. If the husband's assets are left directly to his wife, they get one step-up at his death and another at hers.  However, assets in a traditional credit shelter trust don’t get that second step-up at her death.

Ask your estate planning attorney about this, if you already have one of these trusts. Assets held in an irrevocable trust of the deceased husband that have appreciated since the husband's death can be distributed—in lieu of cash—to the widow. If she holds them until her own death, they'll get another step-up.

Reference: Forbes (February 13, 2018) “Trusts In The Age Of Trump: Time To Re-Engineer Your Estate Plan”


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