"The best-laid plans of mice and men / go oft awry" from Robert Burn's poem "To a Mouse" rings true whenever the U.S. Congress decides to make substantial changes to the federal tax laws.
In December 2017, Congress passed and the President signed the Tax Cuts & Jobs Act. We will discuss other aspects of the Act in the future but for today we will address the increase in the exemption from the federal Estate Tax and what it means to your current estate plan.
A proper estate plan should take into account the federal and state tax laws. The ultimate goal is to pass along as much of your estate to your loved ones as possible. If your Will, Trust, and/or Power of Attorneys are more than a few years old, you should consider having them reviewed and possibly updated to account for any changes in your situation as well as changes in the law.
Tail Wagging the Dog
Prior to 2000, the exemption from the federal estate tax was only $600,000.00 and was lost on the first death if not used properly. The exemption has steadily increased over the years. In 2011, the exemption was $5,000,000.00 and is adjusted annually for inflation. In 2017, it was up to $5.49 million. The New Tax Act doubled the basic exemption; so for 2018 the exemption is $11.2 million.
In addition, there is now "portability" which allows a married couple to double their exemption. In other words, the exemption of the first spouse to die is not lost but may be transferred to the surviving spouse. Using the 2018 amounts, a married couple could exempt up to $22.4 million in assets from federal estate tax. To utilize portability, the surviving spouse needs to file a federal estate tax return with the IRS within 9 months of the first spouse's death.
As you can see, the federal estate tax was a major consideration and planning issue for many people who wanted to protect and pass along their business, real estate, stocks and bonds, and retirement plans.
The Time is Now
Many older estate plans used trusts which were designed to fully take advantage of the federal estate tax exemption. These were commonly referred to as "Bypass", "Credit Shelter", "Marital" "QTIP" and/or "Family" trusts. To work properly, these type of trusts would often restrict a surviving spouse's access to the couple's assets and require a separate set of books and income tax returns after the first death. While Family Trusts are still appropriate in some situations, their use simply as a way to avoid federal estate taxes has diminished with the increased exemption amount. The changes to the federal estate tax may allow you to simplify your existing estate plan.
For those people who still have to worry about the federal estate tax, you need to know that the basic exemption amount is scheduled to return to $5.0 Million (indexed for inflation) on January 1, 2026. So you should look to see if there is something you need to do to take advantage of the current situation.
To make sure your estate plan is up-to-date and takes into account the various changes that have occurred in recent years, contact one of our attorneys experienced in estate planning.