Posted in Asset Protection,Probate & Trust Administration,Tax Law & IRS Defense,Wills, Trusts & Estate Planning

How did tax reform affect estate planning? The tax reform signed into law on December 22, 2017 increased the estate tax exclusion from $5.49 million[1] to slightly over $11 million.[2]  Estate tax is a tax on property transferred upon your death, but only estates valued in excess of the exclusion may owe tax.  In general, assets of a decedent in addition to any lifetime gifts that exceed the annual gift tax exclusion[3] on which gift tax has not been paid, are included in the calculation. For married couples, each spouse could have an exclusion[4]. Most individuals and couples do not have assets exceeding $11 million and $22 million, respectively, so the group to which estate tax is relevant has drastically reduced.

Therefore, income tax planning upon death is more relevant to most people now. There are strategies to minimize taxes to your beneficiaries. Property generally keeps the same characteristics when it is transferred at death as far as its taxable character.  For example, a traditional IRA will still cause your beneficiaries to report income when they take distributions, a sale of a home could cause capital gain tax, and sales of stock could cause capital gains or losses.

Tax reform has not changed the step-up basis rule at death.  Basis is usually the purchase price of the asset with possible adjustments.[5]  Instead of having the same basis as the person who owned the asset (as with gifts during life), the basis of assets transferred to a beneficiary at one’s death is the fair market value of the asset. Generally, the sale price minus the basis is the amount which can be taxed.  If appreciated property (property that increased in value as one has owned it) is given during the lifetime of the grantor, this can result in higher taxes for the recipient when it’s sold than if it had been gifted at death.  On the other hand, it could be advantageous to gift depreciated property to beneficiaries during your lifetime.

However, it’s not quite that simple as other factors can be involved.  One major factor is that overlaying all those decisions can be long-term healthcare issues, such as planning for paying for health-care costs if you need special housing or caregivers as you age.  Gifting assets can have consequences for qualifying for financial assistance.  Another factor is that even just adding another owner may take away your ability to control the asset.

Since no two cases are exactly alike, it is recommended to consult with professionals, such as a tax attorney, accountant, financial planner and estate planning attorney when you create an estate plan and before you gift significant assets.

[1] In 2017.

[2] For 2018, it is now $10 million with an inflation adjustment, which is expected to be slightly over $11 million, with the actual figure not yet released by the IRS.

[3] $15,000.00 (2018)

[4] Portability of DSUE, deceased’s spouse unused exemption.  IRS estate tax return is required, and time limits apply.  See a tax attorney or CPA for details.

[5] See a tax attorney or CPA for details.