The Tax Cuts and Jobs Act of 2017 created many planning opportunities. The Act raised the per person estate tax exemption to $11,200,000. Therefore, the estate tax will apply to very few people – that is until at least December 31, 2025, which is when the new law “sunsets.” Estate planning has changed to focus on the following three areas:
- Simplify your trust
- Income tax basis planning
- Exemption planning
Opportunity to Simplify and Enhance
For over thirty years, the predominant revocable trust (or will) format proved to be complicated, since it provided for a credit shelter trust that used the decedent’s federal estate tax exemption and a marital trust for all other assets. Married couples were forced to split ownership of assets so the trust of the first spouse to pass could implement the complex strategy.
Now, the exemption is much larger and is portable, which means the unused estate tax exemption of the first spouse can be passed on to the survivor. The disclaimer trust format is now preferred in the vast majority of cases. It provides that all assets owned by the decedent’s trust go to the surviving spouse either outright or in a marital trust, if more control is desired. In addition, the survivor may disclaim (refuse to inherit) some or all of the assets. Disclaimed assets go into a credit shelter trust, which uses the decedent’s federal or state exemption, if need be. The surviving spouse can be the trustee and beneficiary of the Family Trust. So, even disclaimed assets are available for use by the survivor. Simple: all assets outright to the survivor and powerful: if the survivor needs to invoke estate tax planning via the disclaimer trust.
Income Tax Basis Step Up is Key!
The amount you pay for an asset, its “basis,” is subtracted from the selling price to determine the amount of gain for income tax purposes. Assets owned by a decedent receive a new basis equal to fair market value at date of death. Such basis “step up” is a valuable tax reduction opportunity. Assets with low basis should be owned by the spouse expected to die first. With the new disclaimer trust format above, assets owned by the trust of the first spouse to die receive an income tax basis step up and another when the survivor passes, so long as the survivor did not disclaim them into the Family Trust at the first death.
Higher Exemption – Opportunity!
The higher federal estate tax exemption presents a planning opportunity that may expire after 2025 or sooner. Farmers, business owners and high net worth families have an opportunity to use the new, higher exemption to place assets in trust and pass them on to future generations without application of the 40% federal estate tax. Several states still impose a separate estate tax, but such can often be eliminated by moving to a new state. Note the federal exemption may be used during life. In addition, often trusts can be established that give the person creating the trust access to trust assets while removing the future growth from estate taxation.
The new tax act has created opportunity for significant tax reduction. Visit your estate planning attorney and CPA and take advantage of the opportunities to simplify and enhance your estate plan.
Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning. Mike shares his deep estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members. Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.