On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act (“Act”). The Act, which became effective on January 1, 2018, could have some effects on individual’s estate planning for many years to come.
One thing that changed significantly under this Act was the federal estate tax exemption that will increase temporarily to $11, 200,000 for individuals and $22,400,000 for married couples. This is an increase from the 2017 exemption amount of $5, 490,000 for individuals and $10,980,000 for married couples. These new exemption amounts are indexed for inflation until 2025, but will revert back to the 2017 levels (adjusted for inflation) beginning January 1, 2026. While the increase of the federal estate tax exemption is significant, it won’t really impact most people’s estate planning.
The highest federal estate tax rates, which apply if you plan to leave assets to your loved ones after your death, remains at 40% for estate assets valued above the $11, 200,000 and $22,400,000 exemption amounts. The so-called “death tax” is calculated based on the value of your assets that exceeds the exemption amount.
One estate planning area that the Act did not make changes to was in regard to the basis step-up of assets at death. Step-up in basis is the readjustment of the value of an appreciated asset for tax purposes upon death, generally determined to be the fair market value of the asset at the time of death.
Another area that wasn’t impacted by the passing of the Act was the annual gift tax exemption. The exemption, which increased from $14,000 in 2017 to $15,000, was already scheduled to increase before the Act was passed.
While the Act may not impact your particular situation, it is still a good time to review your estate planning documents, especially if you have not reviewed these documents in a long period of time. Your current wishes under your estate planning documents may be different than what they were initially when you prepared your estate planning documents. It is also important to determine how assets will be distributed to your beneficiaries and the timing of those distributions. We advise clients to make certain that assets are properly transferred into their Revocable Trust. The main advantage of the Trust is that its assets are distributed without going through the probate court process, which provides quicker distribution of assets to your heirs and avoids attorney fees and filing fees for the probate court.
We always advise our clients to review and update their estate plans annually, and the passing of this Act should give many people the impetus to do just that. If we can be of assistance with you to revise your current estate planning documents or to set up new estate planning documents, we look forward to helping you with these matters.