New tax law means it’s time to review your estate plan
Although the new tax law has doubled the federal estate tax exemption, meaning the vast majority of estates won’t have to pay federal estate tax, that doesn’t mean you have to. ignore its impact on your estate plan.
In December 2017, Congressional Republicans and President Trump increased the federal estate tax exemption to $11.18 million for individuals and $22.36 million for couples, indexed to ‘inflation. (For 2021, the figures are $11.7 million and $23.4 million, respectively.) The tax rate for these few taxable estates is 40%.
Although most estates are not subject to federal estate tax, you should review your estate plan to make sure the changes will not have other negative consequences or to see if there is a better way to transfer your assets. A common estate planning technique when the estate tax exemption was smaller was to leave whatever passed estate tax free to the children of the deceased and the rest to the spouse. If you still have this provision in your will, your children could inherit your entire estate while your spouse would be disinherited.
For example, as recently as 2001, the federal estate tax exemption was only $675,000. Someone with, say, an $800,000 estate who hasn’t changed their estate plan since then might see the entire estate go to their children and none to their spouse.
Another consideration is how the new tax law might affect capital gains taxes. When someone inherits property, such as a house or stocks, the property is usually worth more than it was when the original owner bought it. If the beneficiary were to sell the property, there could be huge capital gains taxes. Fortunately, when someone inherits a property, the property’s tax base is “increased,” meaning the tax base matches the current value of the property. If the same property is donated, there is no increase in the base, so the recipient of the gift will have to pay capital gains taxes. Previously, in order to avoid estate tax, you might have given assets to your children or to a trust, even though this would have had capital gains consequences. Now, it might be better for your beneficiaries to inherit the property.
Additionally, many states have their own estate tax laws with much lower exemptions, so it’s important to consult with your attorney to make sure your estate plan still works for you. To find a lawyer near you, click here.
To find out if trusts are still useful if estate tax is repealed, click here.
Last modification: 03/06/2021