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New Tax Law Means Your Estate Plan Needs a Review

Whenever there is a big change in the tax law, it’s a good idea to review your estate plan to ensure that you are not missing any opportunities. The Tax Cuts and Jobs Act of 2018 is no exception.

A recent article from Newsmax, “Trump Tax Law Necessitates Immediate Review of All Estate Plans,” explains that the new tax law has doubled the allowable credit for the federal estate tax, which is now $11.2 million for an individual and $22.4 million for a married couple. Most Americans will still not need to pay federal estate tax, but estate tax plans still need to be reviewed. Here’s why.

What happens when the first spouse to die has a relatively small estate that doesn’t use all the estate-tax credit, but then the second spouse dies and their estate is more than their applicable estate-tax credit?

Note that a more recent change, called “portability”, allows the unused estate tax credit from the first spouse to die to be used in the second spouse’s estate. This is important: it’s an election and not automatic. Portability will let nearly all the estates of U.S. persons avoid estate taxes. However, for some, estate tax planning is still the major factor in creating an effective estate-planning strategy.

Estate plans drafted and implemented before 2018 should be reviewed. Standard estate plans for married couples before the 2018 increase in tax exemptions and before portability involved the use of a credit-shelter trust and a marital trust to zero-out most estates on the first spouse to die. This is commonly called the A-B trust system.

A credit shelter trust holds assets equal to the estate tax credit. The remainder of the estate funds the marital trust and avoids taxability in the first estate. However, it’s taxable in the estate of the second spouse to die—if that estate exceeds its estate-tax exemption. With the increased tax exemption and portability, many tax experts now think that using the marital trust may not be best for many estates.

For example, the wholesale changes in 2018 Tax Cut and Jobs Act dictate considerations for tax planning. There’s the impact of the new lower tax rate (21%) on corporations, and the 20% deduction on the active business income of pass-thru entities, like LLCs, which hold investments.

Another important complication is the inherited tax basis on the property funding the credit shelter or marital trust, and its projected tax impact on sale.

Review your estate plan to find out how the new tax law will impact your estate plan and your loved ones.

Reference: Newsmax (April 30, 2018) “Trump Tax Law Necessitates Immediate Review of All Estate Plans”

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