What the Changes in the Federal Estate Tax Laws mean for your Estate Plan?
By Libby Banks, The Law Ofﬁce of Libby Banks
Early this year, Congress passed, and the President signed, the Tax Cuts and Jobs Act. Among the changes made to federal tax laws was an increase of the exemption for federal estate taxes to $11.2 Million per person through 2025, at which time it decreases to around $6 Million per person. Estate taxes won’t be levied on any of your assets under the exemption amount. What does this mean for you? It may mean that you need to change your estate plan. What you have now could be too complicated or cumbersome for your estate, and it may not accomplish your objectives.
Back in 1999, the federal estate tax exemption was only $650,000. If you were married and went to an estate planning attorney then, you probably ended up with a Trust that will create two trusts upon the death of the first spouse. In 2012, the exemption was in flux, so plans created at that time may also follow this plan. We sometimes refer to this type of plan as an A-B Trust. I like to refer to the two trusts created at the first spouse’s death as the Survivor’s Trust and the Decedent’s Trust for clarity.
The A-B Trust plan assures that we take full advantage of the deceased spouse’s estate tax exemption. The problem with this plan is it may not do what you intended now that the estate tax exemption is much higher. Often A-B Trusts use a formula to determine how much to put in each trust. That formula could require the trustee to maximize the amount put in the Decedent’s Trust in order to take full advantage of the deceased person’s exemption. This may overfund the Decedent’s Trust and shortchange the Survivor’s Trust. In some cases, this may not be a huge problem. However, if the intent is to care for the surviving spouse until his or her death, overfunding the Decedent’s Trust may not accomplish that goal. This is especially true if the Decedent’s Trust makes children (particularly children from a previous marriage) beneficiaries of the Decedent’s Trust.
The A-B division at the death of a spouse may not be necessary for your trust plan at all. Alternatively, that may still be a good plan, but the terms of the plan may need to be changed to assure that you are leaving the surviving spouse the assets he or she needs and does what you both intended.
Doing away with the required A-B split at death might not be necessary to plan for estate taxes in many cases. This is because we can now take advantage of the deceased spouse’s unused exemption without it. Congress has made a person’s federal estate tax exemption “portable.” In simple terms, “portability” means that when the first spouse dies, the surviving spouse can pick up the deceased spouse’s unused federal estate tax exemption and add it to his or her own exemption. This portability of the exemption has been made permanent. This permits us to take advantage of the deceased spouse’s exemption without creating the Decedent’s Trust.
In addition, the taxes we do still worry about are capital gains taxes: the tax on the increase in value over what you paid for an investment or other asset. What you paid is your basis. We can use your estate plan to assure we get a step up in the basis to the value as of the date of death.
As an example, if you bought an asset for $100,000 and sold it for $300,000, you pay capital gains tax on the difference — $200,000. If your beneficiary inherits it and we have planned properly, they should get a “step up” in basis to the value at your death. So, if that asset is worth $300,000 at your death, and your beneficiary sells it for that price, they pay no capital gains taxes. With proper planning, we can give our beneficiaries a tax advantage.
Everyone should have their estate plan reviewed every three to five years. In particular, if you are married and your estate plan is more than a few years old, please have your attorney review it, or give us a call. We offer a no-charge brief review to determine if your Trust plan still makes sense for you and your family.