Posted by Jordon Rosen, CPA, MST, AEP®
They (Congress) wanted to repeal the “death tax.” They (Congress) told us they were going to repeal the “death tax.” So what happened?
The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017 retained the estate tax system in its present form though 2025, but doubled the basic exclusion amount from $5 million to $10 million per person. Factoring in inflation, the 2018 exclusion is $11,180,000 per person. The top tax rate for estates of 40% is unchanged.
When the basic exclusion went to $5 million, I began writing and lecturing that Americans were beginning to (wrongfully) re-think the need for estate planning. With the amount now at $11 million, my fear is that they will double-down on that philosophy. It was a big mistake then and an even bigger mistake now. Let’s be serious – 10
years ago you would have done estate planning with $11 million, so why not now? Notwithstanding taxes, there are many reasons why you need to consider an estate plan. This includes, but is not limited to:
- The need to provide for a surviving spouse and children
- Asset protection
- The need to provide for a family member with special needs
- The need to provide (and how) for a family member with an addiction
- Providing for a spouse and children of a second marriage
- Providing educational funds for grandchildren
- Charitable legacy planning
- Planning with a closely held business when not all heirs are in the business
- Potential of divorce of children or grandchildren who will be inheriting assets
- Hard-to-value assets
- Legacy for non-U.S. beneficiaries
Another consideration is what to do with an insurance policy that was initially purchased to provide liquidity to pay estate taxes, but now may not be needed for that purpose. It would be foolish to just terminate the policy. Instead, consider donating the policy to charity or simply creating a larger legacy for your children or grandchildren.
Tied to the estate tax is the gift tax. In short, the increased exclusion can also be applied to lifetime gifts (the annual exclusion was increased to $15,000 in 2018). For those with gross estates in excess of the old threshold ($5.6 million per person), but under the new threshold, this becomes an opportunity to reduce your taxable estate through lifetime gifts to the next generation without incurring a gift tax. As with prior gifts, the donee will get your basis in the asset for gain/loss purposes, as opposed to a step-up to fair market value if the asset were inherited (Congress retained the basis step-up rules).
Since most individuals will pass without paying a federal estate tax, the focus needs to be on “asset basis” and on which assets are best to pass during your lifetime and which assets should pass at your death. For example, passing a traditional IRA account to an heir who is in a high tax bracket is not as favorable as leaving them tax-free bonds or a Roth IRA. Conversely, if you are charitably inclined, leaving the traditional IRA to a charity is better planning since the charity doesn’t pay tax on the IRA distribution. Careful and thoughtful estate planning is just as important now as it was before.
If you have questions or want further information on the above or other income, retirement or estate planning techniques, please contact Jordon Rosen at email@example.com.