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No More Waiting! Review Your Estate Plan

Posted by Nina Whitehurst | Mar 15, 2019 | 0 Comments

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Check your estate plan for changes required to meet the requirements and opportunities.

Changes created by the passage of the Tax Cuts and Jobs Act create a need to revisit your estate plan, if you have not already done so, according to The Kansas City Star in “Talk to estate attorney about impacts of Tax Cuts and Jobs Act.” Most of the buzz has been focused on the increased exemptions for estate taxes. However, there are a number of other changes that may have a direct impact on your taxes.

Start by looking at any wills or trusts that were created before the tax act went into effect. If any of the trusts use formulas that are tied to the federal estate tax exemption, there could be unintended consequences because of the higher exemption amounts.

The federal estate tax exemption doubled from $5.49 million per person in 2017 to $11.18 million per person in 2018 (or $22.36 million per couple). It is now $11.2 million per person in 2019 (or $22.4 million per couple).

Let's say that your trust was created in 2001, when the estate tax exemption was a mere $675,000. Your trust may have stipulated that your children receive the amount of assets that could be passed free from federal estate tax, and the remainder, which exceeded the federal estate tax exemption, goes to your spouse. At the time, this was a perfectly good strategy. However, if it hasn't been updated since then, your children will receive $11.4 million and your spouse could be disinherited.

Trusts drafted prior to 2011, when portability was introduced, require particular attention.

Two other important factors to consider are portability and step-up in basis. In the past, many couples relied on the use of bypass or credit shelter trusts that pay income to the surviving spouse and then eventually pass trust assets on to the children, upon the death of the surviving spouse. This scenario made sure to use the first deceased spouse's estate exemption.

However, new legislation passed in 2011 allowed for portability of the deceased spouse's unused estate exemption. The surviving spouse's estate can now use any exemption that wasn't used by the first spouse to die.

A step-up in basis was not changed by the TCJA law, but this has more significance now. When a person dies, their heir's cost basis of many assets becomes the value of the asset on the date that the person died. Highly appreciated assets that avoided income taxes to the decedent could avoid or minimize income taxes to the heirs. Maintaining the ability for assets to receive a step-up in basis is more important now because of the size of the federal estate tax exemption.

Beneficiaries who inherit assets from a bypass or credit shelter trust upon the surviving spouse's death no longer benefit from a “second” step-up in basis. The basis of the inheritance is the original basis from the first spouse's death. Therefore, bypass trusts are less useful than in the past and could actually have negative income tax consequences for heirs.

Reference: The Kansas City Star (Feb. 7, 2019) “Talk to estate attorney about impacts of Tax Cuts and Jobs Act”

About the Author

Nina Whitehurst

Attorney at Law Nina has been practicing law for over 30 years in the areas of estate planning, real estate and business law She is currently licensed in Alaska, Arizona, California, Colorado, Oregon and Tennessee. Her Martindale-Hubbell attorney rating is the highest achievable: 5 stars in peer...

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