It’s important to note, first and foremost, no tax law is permanent. Under TCJA, the exclusion levels sunset December 31, 2025 and return to 2017 levels (adjusted for inflation).
Second, approximately one-third of states still collect estate taxes with significantly lower exclusion limits. “Do not assume if you’re below the federal exclusion limit, you don’t have tax planning to do,” Lauer says.
Have you overplanned?
If you expect your estate value could fall between the 2017 and 2018 federal limits, you’ll want to consider updating your plan. “Some clients have done a lot of estate tax planning,” Lauer says. “They may want to review their existing plan with their attorney to determine if they need to make changes to their existing plan, such as building in some flexibility to adjust to the changing tax law.” These include:
- Lifetime gifting programs. To avoid saddling descendants with estate taxes, some clients gift assets, such as stocks, while the donor is alive. Unlike an inheritance where the beneficiary receives a “stepped-up” cost basis, recipients receive such lifetime gifts with the donor’s existing cost basis. Lifetime gifts could leave beneficiaries with capital gain taxes on those assets. If you’re no longer subject to estate taxes, gifting may be less urgent but it still allows the donor to see their family enjoy the gifts during their lifetime.
- Trust structures. If you have credit shelter trust planning in place to lower potential estate taxes, you may want to discuss using a qualified terminable interest property (QTIP) marital trust with your attorney. Both provide for the surviving spouse, but a QTIP marital trust could reduce capital gain taxes for beneficiaries because the cost-basis resets at the second spouse’s death. The assets in a credit shelter trust do not receive a “step-up” in cost basis at the second spouse’s death.
“The possible opportunities are very specific to the individual,” Lauer says. “The overall goal is to make sure that the planning you’ve done is still appropriate for your estate size and family’s needs.”
The best way to understand the impact of The Tax Cuts and Jobs Act is to review your estate plan with your attorney to determine if updates are needed—not just from a tax perspective, but overall. That should involve a team approach, Lauer says, with discussions and coordination with your estate attorney, accountant, and financial advisor.
A good first step is to work with your financial advisor to update (or create) your net worth statement—how much you’re worth, including all major assets and liabilities. Then add in the death benefit of life insurance policies owned by you, because they are included in your taxable estate as well. Pair that with a list of beneficiaries for your retirement assets, e.g., IRA, 401(k), or annuities, and talk with your attorney and accountant to make sure your plan fits your goals, maximizes the benefits to those you care about, and minimizes taxes.
“Keep that plan updated,” Lauer says. “Review it every five years or when a life event happens: a new child, a divorce, a change of state residency, a move in your net worth, or any significant life change. That includes a new tax law.”