Whenever there is a big change in the tax law, it’s a good idea to review your estate plan to ensure that you are not missing any opportunities. The Tax Cuts and Jobs Act of 2018 is no exception.
A recent article from Newsmax, “Trump Tax Law Necessitates Immediate Review of All Estate Plans,” explains that the new tax law has doubled the allowable credit for the federal estate tax, which is now $11.2 million for an individual and $22.4 million for a married couple. Most Americans will still not need to pay federal estate tax, but estate tax plans still need to be reviewed. Here’s why.
What happens when the first spouse to die has a relatively small estate that doesn’t use all the estate-tax credit, but then the second spouse dies and their estate is more than their applicable estate-tax credit?
Note that a more recent change, called “portability”, allows the unused estate tax credit from the first spouse to die to be used in the second spouse’s estate. This is important: it’s an election and not automatic; thus, taxpayers need to be advised to make this election and choice. Portability has reduced the number of estate subject to federal estate tax. However, estate tax planning is still the major factor in creating an effective estate-planning strategy, as New York has different riles for New York State residents.
Estate plans drafted and implemented before 2018 should be reviewed. Standard estate plans for married couples before the 2018 increase in tax exemptions and before portability involved the use of a technique called credit-shelter trusts and a marital trusts to zero-out most estate tax liability when the first spouse to dies, postponing taxes to the second spouses death. This is commonly called the A-B trust system.
The credit shelter trust receives assets equal to the estate tax credit and the remainder of the estate funds the marital trust both transfers and avoids taxability in the first estate, as the credit amount is below the tax rate and transfer to a spouse passed tax free. However, it’s taxable in the estate of the second spouse to die—if that estate exceeds its estate-tax exemption. With the increased tax exemption and portability, many tax experts now think that using the marital trust may not be best for many estates.
In addition, the changes in 2018 Tax Cut and Jobs Act for tax planning impact taxpayers by lowering the tax rate (21%) on corporations, and the 20% deduction on the active business income of pass-thru entities, like LLCs, which hold investments, creating incentives to change investment strategies.
Capital gains tax implicating the changes in the tax law makes it important to review the planning uou you have done for your loved ones and yourself.
Reference: Newsmax (April 30, 2018) “Trump Tax Law Necessitates Immediate Review of All Estate Plans”