Many of our clients have asked whether they need to review or revise their estate plans as a result of the enactment of the Tax Cuts and Jobs Act (the “Tax Act”). Now that we have had an opportunity to digest this critical change in the law and see how it is playing out in practice, we want to highlight a few issues for you to consider in light of the new law.
Under the Tax Act, the estate, gift and generation-skipping transfer (“GST”) tax exemptions increased to $11.18 million for a single person and $22.36 million for a married couple in 2018, and $11.4 million for a single person and $22.8 million for a married couple in 2019 (subject to inflation-based increases in future years). At the same time, the Tax Act made no changes to the rules that cause the income tax basis (cost) of an asset owned by a person to be “stepped-up” to the asset’s fair market value upon that person’s death.
IMPORTANT PLANNING NOTE: The increased exemptions will expire at the end of 2025. Starting January 1, 2026, the exemptions will revert to at least $5.49 million for a single person and $10.98 million for a married couple (subject to inflation-based increases). Subject to further changes in the law before 2026, listed below are the issues we are focusing on when creating current estate plans for our clients.
1. Simplification: The increased exemptions may enable you to simplify your estate plan by leaving assets outright to your children upon your death, rather than retaining those assets in trust for them.
2. Specific Bequests Tied to Estate Tax Exemption: If your current plan contains any bequests that are equal to the amount of the estate tax exemption and/or the Generation-Skipping Transfer Tax exemption (the “GST exemption”), you will definitely want to review those provisions to make sure they still conform with your wishes.
3. Planning to Reduce Future Capital Gains Taxes: Your current plan may be deficient in minimizing future capital gains taxes for your intended beneficiaries. With proper planning, the future capital gains tax liability can be reduced or even eliminated. For any estate plan that establishes continuing trusts for the lifetime of a spouse, children and/or grandchildren, we strongly urge you to have your trust reviewed to make sure that certain safeguards have been incorporated into the trust to help minimize future capital gains taxes.
4. Use Increased Gift Tax Exemption Prior to 2026: If your estate is significantly larger than the current $11.18 million exemption, we encourage you to consider gifting strategies that will take advantage of that exemption prior to 2026, when it reverts to $5.49 million (with inflation adjustments). The failure to use your gift tax exemption could be very costly. At a 40% estate tax rate, your heirs could pay as much as $2,276,000 in unnecessary estate taxes ($4,552,000 for a married couple).
5. Property Tax Planning: Any of the planning resulting from the Tax Act also must factor in California property tax considerations. While your estate plan may be completely free from estate taxes and properly planned to minimize future capital gains taxes, it may not be appropriately structured to deal with California property taxes.
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