Estate Planning Tax Considerations

Updating Older Estate Plans:

Many estate plans created before 2010 contain tax planning designed to save estate taxes when there was  a lower estate tax exemption in existence. Due to the dramatic changes created by ATRA in 2013, and subsequently, the Tax Cuts and Jobs Act of 2017, the newest tax law now in effect, existing estate plans should be reviewed to determine if your current plan continues to minimize tax liabilities (such as capital gains taxes and the 3.8% tax on net investment income), maximizes asset protection, and effectively accomplishes your goals under the new tax rules. Many older plans include tax planning trusts for the surviving spouse that are no longer needed or wanted.

2019 Tax Law Summary

Under the Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017, these are the current numbers and laws in effect for 2019:

  • Annual Exclusion from Gift Tax.  There is an annual exclusion from gift taxes of $15,000 per person.  Therefore, you may give any one person $15,000 (or $30,000 if you and your spouse are giving a joint gift from each of you) without reporting it on a gift tax return.
  • Estate Tax Exclusion.  You must now have accumulated or given away more than $11.4 million per person and $22.8 million for a married couple before the application of any death taxes.
  • Portability. Portability is a recent law that allows a surviving spouse to apply or “port” any unused excess estate tax exclusion from their deceased spouse’s estate to his or her own estate.  For example, if a husband dies with $2 M in assets titled in his name, he uses up $2 M of the $11,400,000 he is entitled to own upon his death without owing taxes.  As the surviving spouse, the wife receives a large inheritance of $30 M after husband’s death.  Wife can apply her $11,400,000 estate tax exclusion, plus her late husband’s remaining $9,400,000 exclusion to avoid estate tax on $20,800,000.
  • Unified Tax Exclusion.  The estate, gift and generation skipping transfer taxes are unified, so if you gift away your entire exclusion amount of $11.4 million during your lifetime, you will not avoid estate tax on assets in excess of that amount upon your death.  You will, however, get the benefit of an annual increase in the exclusion amount every year as it is adjusted for inflation.
  • Tax Rates.  The estate, gift and generation skipping transfer tax rate was increased from 35% to 40% for any amounts over $11.4 million.
  • Step Up (or Down) in Basis Upon Death.  There is an unlimited step-up (or down) in income tax basis at death.  A “step up in basis” upon death means all property titled in the name of the decedent will go from having a cost basis (the property’s original cost / price) or adjusted basis (such as with depreciated property) up to the full market value upon the day of death.  For example if I buy a house for $200,000 in 2000 (the basis) and sell it in 2010 for $300,000, I have $100,000 in gain, possibly subject to capital gains tax.  If I die with the same property in my name, the value gets “stepped up” to $300,000 without gain recognition.  Basis can also get a “step down” if the asset was bought in a bubble market and full market value on day of death is less than the purchase price was.