On December 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act. Effective January 1, 2018, the law is the most dramatic change to our estate and gift tax system since 2012. The law provides a new opportunity for most Americans to eliminate their estate tax—and greatly reduce their income tax. Here is what Trump’s tax cuts mean for your estate plan.
Change To Estate & Gift Taxes
Trump’s tax plan doubles the amount you can gift or pass to your heirs without being taxed. This is commonly known as your estate tax exemption. The exemptions rise from $5,490,000 to $10,980,000 for a single person and from $11,200,000 to $22,400,000 for married couples. As such, a single person can now gift up to $10,980,000 without incurring estate tax. Likewise, a married couple can gift $22,400,000 without incurring estate tax. The new exemption amounts will increase with inflation through 2026. Beginning in 2026, assuming there are no additional changes, the exemption will revert back to 2017 levels.
Change to Annual Gift Exclusion
In addition to increasing your estate tax exemption, Trump’s tax cuts also increase your federal gift tax annual exclusion. This is the amount you can give annually without incurring tax or using your exemption amount. The annual gift tax exclusion rises from $14,000 in 2017 to $15,000 in 2018. As such, a single person may make “annual exclusion gifts” up to $15,000 dollars to an unlimited number of recipients. Likewise, a married couple may make “annual exclusion gifts” of up to a total of $30,000 to an unlimited number of recipients.
Estate Planning Opportunities for You
Simplify Your Estate Plan
The new law offers an opportunity to dramatically simplify many older estate plans. Under previous tax policies, it was common for married couples to set up two separate trusts. One for each spouse. Upon the death of the first spouse, the deceased spouse’s trust often requires his or her assets to pass to two other separate trusts. Such trusts are often called Bypass Trusts or Credit Shelter Trusts. The idea was to minimize the couple’s estate tax by maximizing the benefit of the first-to-die’s estate tax exemption. Sound complicated? It can be.
While the plans described above were proper for their time. They may no longer be necessary in every case. Given the dramatic increase of the estate tax exemption, most people will no longer be liable for estate tax. Now, only couples with over $22,400,000 in assets will pay estate tax, or $10,980,000 for individuals. Thus, under the tax reform, estate tax is mostly a concern for the wealthiest 1% of Americans.
For the other 99%, the law provides a great opportunity to simplify your estate plan because paying estate tax is no longer a concern for most households. One way to simplify your estate plan would be to use a joint trust, rather than two separate trusts. Doing so will reduce the complexity of your estate plan and reduce the burden for your loved ones who would otherwise have to manage several different trusts.
If you and your spouse have separate trusts, or an older estate plan, the Trump tax cuts may offer an incredible opportunity to simply your estate plan—making things easier for your spouse or children.
Lower Your Income Taxes
The use of a credit shelter or bypass trust described above was designed to lower a person’s estate tax. To do so, however, there was a missed opportunity to lower your income tax. This was done because, at the time, the estate tax was far more onerous than the income tax. Thus, paying income tax was deemed the lesser of two evils.
Under Trump’s tax plan, estate taxes are no longer an issue for the vast majority of households. Thus, their estate plan should be redesigned to lower their income tax—not avoid the estate tax. This can done by eliminating the use of a credit shelter or bypass trust. Doing so causes the deceased spouse’s share to be included in the surviving spouse’s estate. Allowing for a second step-up in basis upon the death of the second spouse and eliminating income tax on the appreciation of assets. For a discussion on step-up in tax basis see here.
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Trump’s tax plan offers an enormous opportunity to simplify your estate plan and lower your income tax. This article is meant to be informative only and not legal advice. Please consult an attorney before making any changes to your estate plan.