You can now pass more wealth onto heirs free of federal estate tax, and there are new opportunities for trusts and gifting to further reduce income taxes.
The new tax law was a gift to wealthy Americans, but taking advantage of the changes requires a review of everyone’s estate plan, according to Forbes’ recent article, “Trusts In The Age Of Trump: Time To Re-Engineer Your Estate Plan.” With the federal estate tax exemption now at a little more than $11 million per person, a couple could leave $22 million to their heirs with no estate or gift tax due. More aggressive wealth planning techniques could allow the transfer of even more money tax free: as much as $250 million, through the use of an irrevocable dynasty trust.
Ask your estate planning attorney about this. You should also have him or her review your current estate plan for booby traps immediately. This is because you may need to redo or scrap your plan. It is especially important, if you live in one of the 15 states that have estate and/or inheritance taxes at much lower levels of wealth than the federal government.
A common mistake is a will that establishes a trust linked to an outdated federal and/or state exemption amount. An old will that leaves the "exemption amount" in a trust for children from the first marriage and the rest to the current wife means the kids' trust would get everything and his wife nothing. In a state like New York, that exempts only $5.25 million from its own estate tax, accidentally leaving the rest to the kids will incur a large state estate-tax bill.
It would be easy to change the will or perhaps to not have any trusts because now there is the "portability" of exemptions between spouses. Prior to 2011, the wills of affluent couples typically created what's known as a "credit shelter" or "bypass" trust. When the first spouse (assume it's the husband) died, an amount equal to his estate-tax exemption went into a trust for his wife and kids. She would have access to trust income and, if necessary, principal. However, his exemption wouldn't be wasted. When the wife died, the trust assets wouldn't be part of her estate. Now, with portability, any unused portion of the husband's exemption passes to his widow, provided the executor of the husband's estate files a tax return electing portability.
Avoiding capital gains tax may be a reason to skip a trust. When someone dies, the assets in his or her estate (including real estate, collectibles, stocks and mutual funds that aren't held in a retirement account) get a step-up in basis to their current value. That means heirs can sell immediately without owing capital gains tax. If the husband's assets are left directly to his wife, they get one step-up at his death and another at hers. However, assets in a traditional credit shelter trust don’t get that second step-up at her death.
When you review your estate plan with your attorney, ask about these types of trusts. If there are assets held in an irrevocable trust of one spouse that have grown since the spouse’s death, they can be distributed to the surviving spouse. If the surviving spouse holds them until they pass, there will be yet another step up. Your estate planning attorney will be able to help you take advantage of the new tax law.
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