Sikich Series on Tax Reform – Estate Planning After Tax Reform: Does This Mean I Don’t Need to Do Anything Unless I’m Rich?

On December 22, 2017, Congress and the White House signed Tax reform into law marking the most sweeping overhaul of the tax code in 30 years. Among the topics that received much attention leading up to this new law was estate tax. Would it be repealed? Would it remain? If so, would the amounts change? Are the changes, if any, permanent? What about the gift tax? Stepped up basis?

The answers are: no, yes, yes, no, it’s still here & ditto!

Estate Tax

More specifically, the “old law” allowed each person an estate valued at $5,600,000 that could be exempt from federal estate tax (also applied to lifetime gifts). Anything in excess would theoretically be taxable. Married couples (or surviving spouses with necessary elections), essentially had over $11 million when they combined their lifetime exclusions. The new law does not repeal the estate tax, but it does double the amount each individual has at their disposal to transfer free and clear of estate tax—during life or upon death—to $11 million/each (or a whopping $22 million for married couples).

Gift Tax & Stepped Up Basis

The gift tax was also not repealed. However, the amount that one can gift to a recipient without reducing your lifetime exemption incurring tax will increase in 2018 to $15,000 per year.

Stepped up basis, which requires the tax basis of most assets held at death to be “restated” to the fair market value at the date of their death in the hands of the recipient (as opposed to a much lower value when the decedent acquired it) was also retained. This ‘step-up’ saves the heirs significant amounts of capital gains tax if, or when, they sell the asset that the decedent would otherwise have had to pay if they sold the asset while they were still alive. The tax reform maintained this provision going forward with no change.

Estate Planning & the Average Taxpayer

Many taxpayers do not have anywhere near $5.6 million dollars of assets to necessitate a need to worry about estate tax, let alone $11 million dollars for married couples. With that said, does that mean that the average taxpayer doesn’t need to worry about estate planning? Not necessarily.

Estate planning most certainly has as a major component the minimization or even elimination of paying estate tax, but there are many more “non-tax” situations where action still needs to be taken:

• Some states have their own estate (or inheritance) tax at different levels than the escalated federal amounts (e.g. the maximum amount before tax imposed in Illinois is only $4 million and anything in excess is taxed at 16%);
• Effective estate planning can eliminate the need for probate, and this is critical if privacy is important to the individual as information submitted to probate is public information accessible by curious outsiders. It is also worth noting that probate may be necessary in several different states at one time depending on where the assets are located!
• Estate planning including a proper will can help insure the orderly transfer of assets to their intended recipients regardless of amounts involved (examples include beneficiary designations on insurance policies, retirement accounts and revocable trusts to name a few);
• Individuals with young children need to utilize estate planning so it is clear as to who will be their guardian as well as ensure that their kids are financially taken care of;
• Placing assets into trust to protect them from creditors of the taxpayer or their children is a technique that is the cornerstone of most estate plans;
• Estate planning can be critical to making sure that a child or dependent with special needs is properly taken care of long after the death of their parents;
• Other documents such as a durable financial or medical power of attorney are just a couple examples of estate planning documents that have nothing to do with paying or avoiding estate tax.
• Lastly, the increases to the lifetime exemption amount expires after 2025 and new rules with lower limits could be enacted in the future.

In short, individuals should take inventory of what their family’s needs and intentions are and plan accordingly, regardless of the value of their assets or current political activities: Plan for a lifetime, not an administration!

If you are interested in a more detailed discussion, or perhaps more information that is specific to your personal situation, please contact one of our Sikich experts at 630-364-7968.