The 2017 Tax Cuts and Jobs Act has simplified estate planning for many U.S. taxpayers yet still provides ample reason for most of us to revisit our estate and wealth transfer plans.  Given the generous increase in the lifetime exemption many think no further action is needed; this could be a costly mistake.  While the increase in the federal exemption may solve a large potential tax bite, many estate planning issues remain making now a great time to review your estate plan to be sure it accomplishes your goals.

The most significant change was the increase to the estate tax exclusion from $5.49 mil. (2017) to $11.18 mil. for 2018.  The higher exclusion practically eliminates planning for the Federal Estate tax as a hurdle for most of us.  However, Washington State residents may still face a State Estate Tax as high as 20% on the taxable value in excess of $2.193 mil. (the State exclusion) for 2018.  The new higher federal exclusion thus shifts the focus for estate planning from minimizing federal estate & gift taxes to reducing potential state estate taxes. Since Washington currently doesn’t have a gift tax, making gifts now will reduce your gross estate and future exposure to estate tax. This savings must be weighed against increased exposure to income taxes as outlined below. 

The new law retains the 100% basis step-up provision upon death.  Basically, this step-up to fair value at time of death allows heirs to sell inherited assets that have appreciated in value and avoid paying capital gains taxes that the deceased would have paid had they sold the property prior to death.  Since Washington is one of the few community property states, married couples receive a basis step-up on 100 % of the community property X2, upon the death of each spouse. Here are a few considerations to take into account for planning:

  • Review wills: What worked twenty years ago may not necessarily work today. Is there a change in heirs or specific bequests?  What about aging, healthcare directives and elder care? Wills alone don’t offer beneficiaries the protection against creditors, scammers, predators etc. afforded by a trust.
  • Evaluate funding formulas: Formulas designed to fund a credit shelter trust to minimize estate tax may not work with the new higher exclusion.  Language that fully funds a Credit Shelter Trust may leave the surviving spouse with nothing.
  • Review durable powers of attorney:  Are your healthcare directives clear and do they meet your wishes? Will your agent act prudently on your behalf when managing your financial affairs? Some POAs have provisions that allow your agent to make gifts which may lead to potential elder financial abuse.
  • Evaluate older trusts: Changes in beneficiaries, guardianships, charitable bequests? Do trust terms still meet its intended purpose?
  • Take advantage of the potential basis step-up in the value of noncash assets: retain swap provisions with Trusts to exchange highly appreciated property from the trust back into your estate in exchange for depreciated assets to capture the income tax savings from a step-up without increasing the estate tax.  

The recent changes in the Estate & Gift tax arena along with the mere passage of time warrants a closer look at your estate plan. We work closely with our clients, their legal counsel and their financial advisers to cover all the bases and provide peace of mind so you may focus on more important matters--  life!