America’s tax code underwent significant reform when the Tax Cuts and Jobs Act of 2017 passed. While the many changes impact both individual income and corporate income taxes, attention should be paid particularly to how estate taxes have been affected.
It remains important to use strategic estate planning with a thorough understanding of both the federal and state exemptions.
What do the changes allow?
An estate tax is a tax on the transference of your property at the time of your death.
The federal estate and gift tax exemption allows individuals a specified value of lifetime gifts and assets to pass to their beneficiaries -- estate tax-free. As of 2017, the federal exemption was $5,490,000. Under the new changes, the federal estate tax exemption has been temporarily doubled. As of January 1, 2018, the exemption is now $11,180,000. With careful planning, married couples can gift up to $22,360,000 exempt from federal estate and gift taxes. In 2026, the exemption limits are scheduled to revert to 2017 limits.
Proceed with caution.
Each state has its own estate taxes separate of the federal taxes, and this is where it can get a little tricky. It is necessary to be mindful of the differences between state and federal exemptions and to use proper planning to maximize tax savings.
For example, New York State currently has an estate tax exemption of $5,250,000.
On January 1, 2019, that exemption will rise to $5,600,000. With adjustment for inflation, that amount corresponds with the federal exemption under the previous tax law, not the new one.
There’s a large difference between the new $11,180,000 federal exemption and the current $5,250,000 New York State exemption.
Existing estate plans may need to be reassessed, as the changed exemption levels may require readjustment.
Beware of the pitfalls of old documents.
Estate plans that were created when exemption amounts were lower could wind up having unwanted results.
For instance, if a family with an estate of $8 million planned to fund their credit shelter trust with $5 million and then give the remaining $3 million outright to named beneficiaries and had wording in their document that stated that the credit shelter should first be maximized, then $8 million would go into the credit shelter trust and no funds would be available to go outright to named beneficiaries.
As this may not be the intent, documents should be carefully reviewed.
Two Types Of Trusts To Consider -- And How To Use Them To Your Benefit
Credit Shelter Trust:
A credit shelter trust can be a viable option for married couples with children who wish to ultimately pass assets to their beneficiaries (children) and also keep those funds available for their surviving spouse for their lifetime.
Upon the death of one spouse, their assets, up to a specified maximum dollar amount, are transferred to the credit shelter trust. This trust can be set up to allow both income and discretionary principal to go to the surviving spouse. Then, upon the passing of the surviving spouse, the remaining trust assets are transferred to the stated beneficiaries (e.g., children) without any estate taxes levied.
This can be an excellent way to leverage estate tax savings, as there is no estate tax due when the assets are transferred to the trust or when ultimately distributed to beneficiaries -- if properly executed.
Disclaimer Trust:
This trust offers flexibility to a surviving spouse under embedded provisions, which are usually contained in a will. If an investor passes away and leaves his wife an estate, she may decide to “disclaim” -- or give up -- ownership of a portion of the estate, which is then added directly to the trust as if it were the original beneficiary.
Provisions could be included that provide for beneficiaries to receive regular payouts from the trust.
The great benefit of this is the ability to transfer disclaimed property interests without being taxed and the fact that determination of whether to fund the disclaimer trust or not is made by the surviving spouse after the death of her spouse.
The surviving spouse has nine months to make this decision after losing her spouse.
Ways You Can Save On Estate Taxes
• Make sure that you have estate planning documents which potentially include: wills, trusts, powers of attorney, living wills and health care proxies.
• Verify that your estate planning documents reflect your current wishes.
• Review credit shelter trusts and revise the funding formula, if necessary, or create disclaimer trusts.
• The annual exclusion amount for lifetime gifts increased on January 1, 2018, from $14,000 to $15,000 per recipient per year or $30,000 for married couples. Consider taking advantage of these. Assess if it is cost-effective to make gifts above the annual exclusion amount.
• Seek other ways to financially benefit heirs without incurring gift or estate tax consequences. Consider investing in education savings plans or making direct payments of tuition and/or medical expenses on their behalf. Payments made directly to the provider of the services (tuition or medical) can exceed the $15,000 annual gifting limit without incurring any gift tax.
• Consider making significant gifts using valuations discounts.
• Consider consolidating accounts for ease of management and estate administration.
• Review your philanthropy plan to take advantage of tax-saving strategies.
• If necessary, revise your estate planning documents if you move to another state.
Planning for special needs takes extra consideration. Although estate tax savings may not be the primary goal, it is important to consider other implications to ensure your family member or beneficiary with special needs is best taken care of and government benefits are not lost. Working with an experienced estate attorney is a must.
As estate and gift tax laws are subject to changes, it is important to stay informed about the most current updates in effect.
Even as alterations to the tax code can provide an opportunity for significant estate tax savings, personal changes should be monitored closely and readjusted accordingly to maximize the potential benefits.
