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Reconstructing Your Estate Plan in the New Tax Environment

As a result of the tax legislation passed in 2018, many individuals are now needing to reengineer their current estate plans. The new legislation effectively doubled the individual exemption from $5 to $10 million, and with inflation adjustments, the exemption increased to $11.4 million is 2019.

So, what now?

Many estate plans were put in place when the exemption was as low as $600,000. Because of high estate tax rates, assets were gifted outright or to trusts for the next generation of descendants to reduce the size of taxable estates. However, this strategy may no longer be the most efficient structure because assets transferred by gift do not receive a basis step-up to fair market value at the time of transfer. On the other hand, assets that pass through an estate at death now receive a basis step-up at such time.

For individuals no longer exposed to the estate tax as a result of the much higher current exemption, retaining assets may be a better strategy so that beneficiaries will have a higher cost basis on the later sale of inherited property. It may also be necessary to reverse or neutralize the effect of the transaction where gifts have been made.

A/B trusts

Many people set up wills with trusts to receive exemption amounts (sometimes referred to as A/B trusts). However, the over funding of the exemption trust (or B trust) can create unintended consequences. Typically, the B trust assets will not receive a step-up in basis on the surviving spouse’s death nor will the surviving spouse have access to the funds. Now that the exemption amount has increased, wills should be reviewed to insure the directions do not over fund the exemption trust.

Revocable trusts

Some individuals have set up living trusts (otherwise known as revocable trusts) in an effort to establish a trustee to manage assets if the individual becomes incapacitated. Others place out of state property in trust to avoid an ancillary probate proceeding in another state in the event of death. And further still, some people prefer the fact that the trust provides privacy as it is not available for disclosure to the public as a probated will.

Assets in such a trust will receive a stepped-up basis to fair market value at death. Typically, assets in the trust can be exchanged by the trust creator (grantor) for assets of similar value. Therefore, the grantor can substitute low basis assets for high basis assets to receive the step-up at death.

High net worth individuals may still seek to remove highly appreciating assets from their estate and take advantage of the high exemption amount that is now available. Numerous gifting techniques (GRAT’s, Charitable Trusts and IDIT’s) that leverage the value of gifting to avoid estate tax remain under the current law. Additionally, in the low interest rate environment that currently exists, some of these techniques are further enhanced.

What’s next?

This exemption increase is not permanent and will sunset at the end of 2025 like many tax provisions in the 2018 tax legislation. When the current legislation sunsets, the exemption amount will go back to roughly $6 million after inflation adjustments. Some believe the exemption could be changed sooner depending on the 2020 election results.

In addition, the New York State exemption is much lower and has phase out provisions, which in some cases can eliminate the exemption entirely. Therefore, individuals with estates valued at more than $5 million should factor in the state estate tax implications.

For those seeking to transfer business interests, the present low rate interest environment presents a golden opportunity. With this area of the law changing as often as from year to year, reexamining your planning should take place regularly.

Our estate planning experts at The Bonadio Group are available at any time to help walk your through these changes, the resulting implications and the next steps that make the most sense for you. Reach out today to learn more.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.