New Year. New Tax Plan. Same Estate Plan?

The year 2018 brings some changes to the law which may affect your estate plan – likely for the better for most individuals.  Regardless of your opinion of the “Tax Cuts and Jobs Act,” [the “Act”] it is now law, and your situation must be assessed in light of the changes made for purposes of planning for the future of your estate, your income, and your business entities.

The changes will leave more money in the economy and take less away from families who have worked to establish stability for their families and employees.  This means less businesses will need to be shut down just because the owner died and the family does not have enough cash to pay taxes on the business.  This means more job continuity and stability.   It also reduces the impact of the unfair double-taxation of the family inheritance (those that have worked their entire lives to build wealth for their family, paying all taxes along the way, must then pay a huge 40% tax when they die).

From an estate planning perspective, the Act changes the amount of money which can be inherited tax-free by the federal government, at least temporarily.  The Act doubles the exemption for estate, gift and generation-skipping taxes from the previous $5 million base (per person), originally set in place in around 2011, to a new $10 million base (per person), for tax years 2018 through 2025.  A married couple can utilize something called “portability” to combine their exemption into a massive $20 million gift to their heirs without federal taxation.  Please note, however, that like most laws, it is not permanent, and is set to expire at the end of 2025 unless Congress decides to renew.  Note, California does not have an inheritance tax, so there’s no change there.

Also, the step-up in cost basis was left unchanged, which means heirs and beneficiaries will not have to pay capital gains on appreciated assets if they choose to sell them after a death because the value of those assets will be established as of the date of death and not the date of original purchase.  Of course, some capital gains may be due if an asset is sold above the value established as of date of death, but that number is generally much smaller than the amount that would have been due (especially on a home mom and dad had purchased 60 years earlier).

This is huge news if you plan on dying with a degree of certainty between 2018 and 2025.  Otherwise, the most conservative planning approach is to wait and see what the future holds.  Congress may not renew the plan and many of us will live to see 2026.

Meanwhile, there is good news if you want to gift money to the next generation (while you’re still alive) because the amount jumped from $14,000 to $15,000 per year (to unlimited persons).  Strategies to consider include:

  • Make gifts to existing/new irrevocable trusts, including generation-skipping trusts while the exemption is higher
  • Leverage gifts to support and fund life insurance or existing sales to trusts, and
  • Continue to pair gifts with philanthropy (such as charitable lead trusts)

Of course, if you have a highly appreciated asset, you should probably still wait until death to pass it to the next generation due to the cost-basis.

What does this mean if you have an A-B living trust?  Not much.  If you elected to have an A-B trust, it was for one of two major reasons.  1) You wanted to preserve your spouse’s exemption and did so by using an A-B trust before the portability law made that unnecessary.  2) You wanted to ensure that your part of the assets in your trust passed to your beneficiaries and did not want your spouse to have the ability to change it after you pass away.  If you do not want an A-B trust

What does this mean for your business?  This change in the law is particularly useful to family businesses (and closely held businesses) which have a high value but do not provide a lot of cash liquidity for inheritance tax purposes.  The inheritance tax will either not apply because the threshold is high enough for the family business to clear, and/or if the business is sold after death, the step-up in cost basis will preserve more funds.

In summary, one of the biggest questions clients will ask in 2018 will be whether or not they need to update their estate plan in light of the changes made in the Tax Cuts and Jobs Act.  The short answer is probably not.  For most, it means you need not worry as much about the inheritance tax or paying capital gains… at least for now.  The trust is still a great way to keep your money out of probate court.  A corporation or limited liability company is still the best way to insulate your estate from your business creditors.  Law Office of Merrill A. Hanson is still the best place to get your legal advice.

Originally posted January 2, 2018 by Merrill A. Hanson.  This is not legal advice, so do not rely on it. Seek an attorney to give you advice about your specific situation.

150 E. Meda Ave., Suite 200
Glendora, CA 91741

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