Estate Planning Following the 2017 Tax Act; The “New Normal” Part I

Did the new tax act (commonly known as the Tax Cuts and Jobs Act of 2017, referred to in this Memo as the “Tax Act”) simplify estate planning or has it made planning more complex?  For most, the greatly increased estate tax exemption has made estate tax a non-issue, and planning, therefore, has become simpler.  For larger estates, techniques should be considered to take advantage of planning opportunities.  For all, however, the uncertainty of estate taxes, the large estate tax exemptions, portability, and a renewed interest in income tax planning has ushered in a “new normal” for estate planning.  I invite all of you to ponder your current estate plan in light of the monumental changes in the law.

The current estate tax exemption is now $11.2 Million for each individual, but will revert to around $5.5 Million (adjust for inflation) after 2025. It would be a mistake to only compare an individual’s current net worth to the current exemption.  Consider your current wealth but also potential future growth.  A net worth of $5M now might be $10M+ in 2026 when the increased exemption sunsets.

It may be helpful for you to see relevant issues and examples of strategies employed based upon the size of the estate and commonly encountered objectives.

1. Planning for Married Couples and Single Individuals with Estates Under $5.5 Million.

The major focus for estate planning for those having assets under $5.5 Million will be planning for where property goes after you die, who manages your financial affairs if you become incapacitated, and coordinating your trust with beneficiary designations.

The following are several matters which you may want to keep in mind:

A) Transfer Taxes Generally Irrelevant. Estate taxes will generally be irrelevant for people in this range, because the estate tax exemption is so large.

B) Income Taxes Have Become More of a Consideration. A key issue for all will be preserving a “step-up” in basis at death (adjusting the tax basis of an asset held at death to its fair market value) and perhaps also at the death of your spouse, which has the effect of reducing or eliminating capital gains upon sale by an heir of appreciated property.

C) Preservation and Management of Assets. A key decision will be whether to include in your revocable trust a trust for a surviving spouse after the first death, or a child after both parents have died, for non-tax reasons.

Reasons that a trust may be appropriate for a spouse after the first death include:

• The surviving spouse is not capable of managing assets;
• There is a second marriage blended family and each spouse wants to control where his or her assets will pass;
• An individual has substantial separate property and wants to ensure that property passes to his or her children;
• There is a desire for asset protection for the surviving spouse.

If a trust is used to hold the first to die’s share of assets for the benefit of his or her spouse, should that trust be a Bypass Trust (a typical AB trust) that uses the estate tax exclusion of the first to die, but does not receive a basis adjustment upon the death of the surviving spouse, or a Marital QTIP Trust, which is the survivor’s estate but receives a basis adjustment at the second death. Or should you provide a means to make that choice after the first death? (See #2, the next post).

Planning for smaller estates may be simpler, but if you have an “AB” or “ABC” trust prepared years ago, and if done solely for estate tax reasons and not for one of the non-tax reasons referenced above, you may need to modify your trust in order to take advantage of this simplification, or in order to obtain a step-up in basis at the second death.

To be continued.