In late December 2017, the Tax Cuts and Jobs Act was enacted, increasing the exemption amounts for the federal estate, gift, and generation skipping transfer taxes.  The law set the federal estate, gift, and generation skipping transfer tax exemption amounts at $10 million per person, adjusted for inflation (approximately $11.18 million in 2018).  As a result of the portability provisions of federal estate tax law, a married couple may now leave up to approximately $22.36 million to their descendants, free of federal estate taxes, without estate planning.

     In light of portability and the generous federal tax exemption, clients may wonder whether they need an estate plan.  Some may consider leaving their assets outright to their spouse and children.  As discussed below, there are still substantial tax and non-tax reasons for having a well-drafted estate plan in place.

TAX ISSUES:

            Limited Time

As the current tax law is written, the increased exemption ends on December 31, 2024.   Prominent Democrats have stated that repealing the Tax Cuts and Jobs Act will be a priority, should they regain control of the Congress and the Presidency, so we may not even have the full six years with this higher exemption amount.   In the meantime, clients have an opportunity to gift assets to or for the benefit of their children and grandchildren without incurring gift taxes.   This would allow the assets to grow outside of their estate, letting the appreciation escape federal estate taxes entirely, even if the exemption amount goes down before their death.   It will be important for clients to consider the interplay of estate tax and capital gains tax planning in deciding what assets to gift.

Limitations on Portability

     The portability of tax exemption amounts between spouses does not extend to Massachusetts or other state estate tax exemptions.  Although trusts are no longer required to shelter a surviving spouse’s federal estate tax exemption, trusts are still necessary to protect a couple’s state estate tax exemptions.  For example, a married couple residing in Massachusetts with combined total assets of $2 million would save approximately $100,000 in Massachusetts estate taxes by implementing and funding simple “credit shelter” trusts to hold assets for the benefit of the surviving spouse, rather than having the assets go to the surviving spouse outright.

     Portability also does not apply to generation skipping transfer tax exemptions.  Without proper estate planning, clients’ assets will eventually be taxable in their children’s estates.  However, properly drafted trusts with generation skipping transfer tax provisions can save their descendants from potentially paying millions of dollars of extra taxes.  When properly structured, these trusts would allow the assets to be sheltered from estate tax in the children’s estates.

    Finally, portability is not automatic.  It must be preserved by an election made on a timely filed federal estate tax return by the estate of the first deceased spouse.  If portability is relied upon in lieu of proper estate planning, many estates that are below the federal $11.18 million filing threshold will be forced to file a federal estate tax return simply to preserve portability for the surviving spouse’s estate.  Proper estate planning would allow clients to avoid the necessity of filing a federal estate tax return, and its preparation cost, simply to preserve portability.

Estate Taxation on Appreciation of Assets During Lifetime of Surviving Spouse

     With proper estate planning, the estate tax exemption amount is distributed into a trust upon the death of the first spouse.  These assets will not be taxable in the estate of the surviving spouse.  In addition, these assets may grow during the time between the first death and the second death.  If properly structured, any appreciation during this time will escape estate tax.  In contrast, without estate planning, the assets pass would outright to the surviving spouse.  In that case, any appreciation on the assets will be fully taxed upon the death of the surviving spouse.  The result is additional tax to be paid by the client’s family.

NON-TAX ISSUES:

Probate Avoidance

     A revocable trust is also designed to help a decedent’s family avoid or minimize the publicity, delay and costs of the probate process.  If assets such as investment accounts or real estate are transferred into a revocable trust during lifetime, they will avoid probate upon the decedent’s death.  They will automatically pass under the terms of the trust without court involvement.

Creditor Protection

     Without proper estate planning, if assets pass outright to a spouse or a child, claims against the spouse or child may be satisfied through the inherited assets.  In contrast, assets passing to a trust for the benefit of a surviving spouse or a child may be afforded certain protections when the trust is properly drafted.  Since the assets are held in the name of the trust and not in the name of the beneficiaries themselves, to the extent that the beneficiaries cannot control the trust assets, those assets may be shielded from their creditors.

Incapacity

     Estate planning documents are designed to plan for the possibility of future incapacity.  For example, if a trust creator becomes incapacitated, the trustee is able to access and manage the trust assets.  A durable power of attorney allows an agent to manage assets or finances if the principal should become incapacitated.  A health care proxy similarly allows an agent to make medical decisions upon incapacity.  Finally, a living will may instruct an agent under a health care proxy as to an individual’s wishes concerning certain life-sustaining treatments in the event of a terminal illness.

Experienced, Expert Advice

Estate planning is often based upon a mix of legal, emotional and practical decisions.   Working with an experienced attorney who focuses his or her practice in estate planning provides a client with the benefit of the knowledge the attorney has developed, not only on through formal education, but in working with clients to build solutions over the years.

Peace of Mind

     Finally, an estate plan provides peace of mind.  A last will and testament or a revocable trust ensures that upon an individual’s death, the assets will be distributed or held for the individual’s family and loved ones according to his or her wishes.  Documents such as the durable power of attorney, health care proxy, and living will ensure that a plan is in place for care if the individual ever becomes incapacitated.

     Consulting with an estate planning attorney to determine your estate planning needs will maximize the benefit that you and your family can achieve from your estate plan.  Please contact any of the attorneys in Pabian & Russell’s Estate Planning Department to discuss your estate planning goals.