It is possible that certain strategies or language in your estate plan may no longer work, or may have unintended consequences, if it was created before the Tax Cuts and Jobs Act was signed into law in December 2017.
Anytime there is a major change in your life or in the law, it is wise to learn if your estate plan needs to be updated. This is particularly true if your estate plan has not been reviewed since the new tax law went into effect, according to this article, “Talk to estate attorney about impacts of Tax Cuts and Jobs Act,” from The Kansas City Star.
A big change in the tax law is the doubling of the federal estate tax exemption from $5.49 million per person in 2017 to $11.18 million per person in 2018 (or $22.36 million per couple). In 2019, the federal estate tax exemption is $11.4 million per person (or $22.8 million per couple).
You should review any wills or trusts drafted prior to the passing of the 2017 legislation. If the trusts use formulas tied to the federal estate tax exemption, then there could be unintended ramifications because of the new larger exemption amount.
You should also look at trusts drafted prior to 2011, when portability was introduced. This legislation allows for “portability” of the deceased spouse’s unused estate exemption. Therefore, the surviving spouse’s estate can now use any exemption amount that wasn’t used by the first deceased spouse’s estate.
The Tax Cuts and Jobs Act didn’t change the step-up of basis. However, the unintended effects of this “non-event” are potentially more significant now. When the decedent dies, the heir’s cost basis of many assets becomes the value of the asset on the date of their death. Thus, highly appreciated assets that avoided income taxes to the decedent, could also avoid or minimize income taxes to the heirs.
Maintaining the ability for assets to receive a step-up in basis is a more important part of estate planning now because of the larger federal estate tax exemption. However, note that beneficiaries who inherit assets from a bypass or credit shelter trust upon the surviving spouse’s death don’t benefit from a “second” step-up of basis. Instead, the basis of the heir’s inheritance would be the original basis on the first spouse’s death.
As a result, bypass trusts are much less useful than in the past and could have negative income tax impacts for heirs. This is particularly true if the assets appreciated significantly after the first spouse’s death or if there was a relatively long amount of time between spouses’ deaths. If your current trust establishes a bypass trust at your death, you might want to ask your estate attorney about restructuring how the bypass trust is funded for the larger federal estate tax exemption.
Many of the provisions in the new tax law expire in 2025, but unless you can be absolutely certain that you aren’t going to die before that date—something none of us can possibly know—make sure to have your estate plan reviewed in light of the new law.
Reference: The Kansas City Star (February 7, 2019) “Talk to estate attorney about impacts of Tax Cuts and Jobs Act”