By now, everyone has heard about the New Tax Act and how it will impact your family’s income taxes in 2018. However, the New Tax Act also made significant changes to the federal estate tax laws. Most importantly, the so-called single exclusion amount (which I usually refer to as the estate tax exemption amount) increased from $5.49 million per person in 2017 to $11.2 million per person in 2018, plus cost of living adjustments. There is a sunset clause on the single exclusion amount on December 31, 2025, which means that, on that date, the single exclusion amount will go back to the 2017 single exclusion amount of $5.49 million, plus annual cost of living increases. In general, this means that, for 2018, a single person who passes away will not have to pay any estate taxes unless his or her estate exceeds $11.2 million. In addition, for 2018, married couples do not have to pay any estate taxes on their estate when the second spouse passes away unless their estate exceeds $22.4 million. With these high estate tax exclusion amounts, estate taxes, which used to affect a large number of families in the 1990’s when the single exclusion amount was only $600,000, will hardly affect any families in the United States. Thus, if you have updated your estate plan recently, then you are probably already aware of these changes and they may have been incorporated them into your plan, but if you have not updated your trust in 15 or 20 years, then you will definitely need to go back to your estate planning attorney to have your estate plan reviewed and updated, if necessary. This blog discusses which estate plans are affected the most by the New Tax Act and gives recommendations about what kinds of changes need to be made.
Under the old estate tax laws (especially prior to 2010), many attorneys advised clients to structure their estate using “A-B” or “A-B-C” trusts to minimize or avoid estate taxes. These trusts require the division of the trust assets between two or three trusts after the death of the first spouse. It made good sense at the time (because the single exclusion amount was much smaller), but today this structure is no longer required for most clients. A-B or A-B-C trusts now produce unnecessary costs and administrative burdens, such as:
Under the New Tax Act, most families stand to reap significant benefits from amending their estate plan to a simple living trust (or in some cases a different type of trust known as a QTIP trust, which I will discuss more in a future blog), such as:
For some families (especially those with estates over $11.2 million), there are still some advantages to keeping the A-B or A-B-C trusts in place. However, for most families, we recommend that they take advantage of today’s higher single exclusion amount to lower expenses and the administrative burden for your spouse and loved ones. Have your plan reviewed to see if you would benefit by switching to a simple living trust. The cost of converting to a simple living trust now would be less than the first-year cost of administering an A-B or A-B-C Trust.
Of course, beyond the need to convert to a simple living trust, it is also important to have your estate plan reviewed every few years to address other changes to your family and new legal developments that will help to improve your estate plan.
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