Estate Planning for the Rest of Us

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The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, increased the federal estate tax exemption (the assets a person may own before being subject to estate tax) to $11,180,000 for 2018. This more than doubled the then-existing exemption and it is 17 times what it was only 20 years ago. With inflation adjustments and the ability of a widow or widower to use the predeceased spouse's unused exemption, the estate of a married couple will pay no tax on the first $22,800,000 of assets in 2019.

 

Due to these changes, less than 1/10 of 1% of current deaths will now create an estate tax. Many people think that since their assets do not approach these thresholds, they do not need to concern themselves with estate planning. But there is much more to estate planning than simply avoiding the federal estate tax. Nontax planning issues include:

 

  • availability of assets to benefit a surviving spouse and other heirs
  • custody of minor children
  • determining how assets will ultimately be distributed
  • succession planning for managing a closely held business
  • charitable objectives
  • deciding if trusts are desirable
  • avoiding probate
  • addressing second marriages, stepchildren, and other complexities
  • family members with special needs or who are not financially responsible 

 

An attorney should be consulted to draft or update legal documents such as wills, powers of attorney (both financial and health care) and living wills. Wills, trusts, and other documents created 10 or 20 years ago may be obsolete in the changed environment. Life insurance and retirement accounts beneficiary designations should be reviewed and updated if warranted.

 

The TCJA estate tax increases are scheduled to "sunset" after 2025. The exemption will return to about $6,000,000 in 2026. Some taxpayers who are now far from the TCJA exemption level may find themselves more concerned about possible estate tax as the sunset date approaches, especially if their assets grow in the intervening years.

 

Even if no estate tax is due and no tax return is required, beneficiaries still receive a step-up in the basis of assets they inherit from a decedent. This means when an inherited asset is later sold, the tax gain or loss for the beneficiary is based on its value with the decedent died, not what was originally paid for it. Planning of ownership between spouses, and with trusts, can maximize the step-up of assets and reduce the capital gains tax to be paid by beneficiaries.

 

A third of the states still have state estate taxes, many with lower thresholds that the federal exemption (New York's is $5,740,000). A tax may be due to a state even when assets do not exceed the federal exemption. In this case planning many be needed to minimize the estate tax burden at the state level.

 

Your LMC professional can help guide you with these estate planning issues. All our prior Alerts are available on the Updates page of our website

 

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