The new tax reform act set forth a variety of tax law changes for individuals and business entities; our blog post in December provides detail on those changes and their implications.
Only one of those changes relates to the estate and gift tax, but the impact is dramatic: the estate and gift tax exemptions were doubled, from $5.49 million in 2017 to an estimated $11.2 million in 2018 (subject to inflation adjustments in future years). The thresholds apply to each individual; thus, married couples enjoy twice the exemption.
Under the new law, fewer families will be exposed to estate and gift tax. However, estate planning is still necessary. A “do nothing” strategy could cost your family dearly.
Acting swiftly is a wise move.
Like most of the provisions in the new law pertaining to individuals, the increase in the estate and gift tax exemption is only temporary. In 2026, the exemptions are scheduled to revert back to their pre-2018 levels. Those who utilize the super-sized exemption by making gifts before it reverts back will likely be “grandfathered” in under the 2018 law, allowing them to transfer additional wealth tax-free. Those who sit on the sidelines will have missed the opportunity.
If 2026 seems far away, don’t count on it. This “use it or lose it” scenario may present itself in 2025 or sooner, depending on the political landscape. Legislation could be passed that reduces the exemptions earlier, particularly if the Democrats gain control of Congress and the White House. Either way, it warrants attention. And those who have the means to make substantial gifts may not want to wait; by gifting now, future income and appreciation can be removed from the donor’s taxable estate. Furthermore, by using trusts, gifts can be structured to give the donor indirect control and access to the gifted funds.
You may need to revise your estate planning documents.
Provisions in your will or revocable trust that made sense when the estate tax exemption was lower could cost your family substantial tax dollars today. One common example is the credit shelter trust (CST). The CST used to be the one-size-fits-all approach favored by estate planning professionals to minimize estate taxes for married couples. However, under the new law, CSTs not only are unnecessary for many couples, they may increase income taxes to the family. You can find a more detailed discussion of this issue here. In short, it may be advisable to amend your will or revocable trust to eliminate a CST. Alternatively, flexible provisions could be added to your documents to allow your executor or surviving spouse, after your death, to decide whether they want a CST.
Non-tax reasons for estate planning remain.
Regardless of the size of the estate and gift tax exemptions, proper estate planning can provide various non-tax benefits. Here are just a few examples.
- Avoiding Probate: By creating and funding a revocable trust, your estate can avoid probate, or at least minimize the assets that are subject to probate. Probate is the process by which a court oversees the distribution of a decedent’s assets. Avoiding or minimizing this process can accelerate the transfer of assets to your family and can reduce or eliminate court costs and attorneys’ fees.
- Planning for Incapacity: A revocable trust also provides a mechanism for a family member or other trusted person to manage the trust property if you are incapacitated. This “successor trustee” can make investment decisions and pay your bills while you are unable. This can avoid the need for a court-appointed guardian.
- Protecting Your Family from Creditors and Predators: Estate planning often includes the creation of one or more trusts to protect your family. The trusts can be created and funded while you’re alive through gifts, or created and funded upon your death through your will or revocable trust. Either way, the trusts can be structured to protect assets from claims by your family’s creditors and from their spouses in the event of divorce. In many cases, your heirs can be given significant control over the trust assets (if you want) without forfeiting the creditor and divorce protection.
- Business Succession: Rarely are all family members equally involved in a family business. Complications, or even litigation, can arise when you don’t have a well-conceived plan for passing control and the economic benefits of the business to your heirs. An estate plan can tackle these issues, and perhaps provide a mechanism to leave the business to one child while equitably providing for the others.
Contact an Estate Planning Professional
The new tax reform act increased the thresholds at which estate and gift tax apply – at least temporarily – but it did not eliminate the need for estate planning. In fact, the new rules may be grounds to consider additional gifting, or, at the very least, a review of your existing estate planning documents. I encourage you to contact me or another member of Kaufman Rossin’s estate and trust team to discuss these issues.
Scott L. Goldberger, J.D., is an estate and trust principal in Kaufman Rossin’s Boca Raton office. Kaufman Rossin is one of the top CPA firms in the U.S. and offers sophisticated estate planning services for high-net-worth individuals. Scott can be reached at firstname.lastname@example.org .