Estate planning attorneys advise meeting about how the Tax Cuts and Jobs Act could affect your taxes.
If you haven’t had a talk with your estate planning attorney since before the Tax Cuts and Jobs Act (TCJA) went into effect in 2018, now would be a good time to do so, says The Kansas City Star in the article “Talk to estate attorney about impacts of Tax Cuts and Jobs Act.” While most of the news about the act centered on the increased exemptions for estate taxes, there are a number of other changes that may have a direct impact on your taxes.
Start by looking at any wills or trusts that were created before the tax act went into effect. If any of the trusts use formulas (and lots of married couple’s trusts do) that are tied to the federal estate tax exemption, there could be unintended consequences because of the higher exemption amounts.
The federal estate tax exemption doubled from $5.49 million per person in 2017 to $11.18 million per person in 2018 (or $22.36 million per couple). It is now $11.4 million per person in 2019 (or $22.8 million per couple).
Let’s say that your trust was created in 2001, when the estate tax exemption was a mere $675,000. Your trust may have stipulated that your children receive the amount of assets that could be passed free from federal estate tax, and the remainder, which exceeded the federal estate tax exemption, goes to your spouse. At the time, this was a perfectly good strategy. However, if it hasn’t been updated since then, your children will receive up to $11.4 million and your spouse could be disinherited.
Two other important factors to consider are portability of the federal estate tax exemption between married couples and the “step-up” of cost basis of inherited assets. In the past, many couples relied on the use of bypass or credit shelter trusts that pay income to the surviving spouse and then eventually pass trust assets on to the children upon the death of the surviving spouse. That structure made sure the first deceased spouse’s estate exemption (think of it as a coupon) was used and not lost.
However, new legislation passed in 2011 allowed for portability of the deceased spouse’s unused estate tax exemption. The surviving spouse’s estate can now use any exemption that wasn’t used by the first spouse to die by simply electing so on a final estate tax return.
The availability of a step-up in basis was not changed by the TCJA law, but it has even more significance now that the estate tax exemption is so high. Here’s how it works, when a person dies, their heir’s cost basis of many assets (any assets included in the estate of the deceased) becomes the value of the asset on the date that the person died. If those assets are later sold, capital gain will be based on the sales price of the asset, minus it’s basis (fair market value at date of death). That means highly appreciated assets can minimize or escape income taxes to the children or other heirs if they are later sold, because the basis was “stepped up” to its fair market value a second time upon the death of the surviving spouse.
On the other hand, children or other beneficiaries who inherit assets from a bypass or credit shelter trust upon the surviving spouse’s death do not benefit from a “second” step-up in basis, because those assets are not considered included in the estate of the surviving spouse. The basis of those inherited assets is the original basis from the first spouse’s death. Therefore, bypass trusts are less useful than they were in the past in many cases, which could have significant negative income tax consequences for heirs.
If your current estate plan has not been amended for these or other changes, make an appointment soon to speak with a qualified estate planning attorney. It may not require huge overhaul of the entire estate plan, but these changes could have a negative impact on your family and their future.
Reference: The Kansas City Star (Feb. 7, 2019) “Talk to estate attorney about impacts of Tax Cuts and Jobs Act”
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