By Charles Des Roches, Rob Simpson, and Leslie E. Finnegan
Attorneys, Noland, Hamerly, Etienne & Hoss
You've worked hard to build up and/or maintain a certain amount of wealth over your lifetime, and you'd like to see your beneficiaries inherit your wealth with little or no tax liability.
In the last couple of years, you’ve heard that the estate tax was updated in your favor. Perhaps you’ve read an article explaining how the federal estate tax exemption has increased so much that you won't have any estate tax concerns and don't need to do any complicated tax planning.
Is that right? The answer to this question is the typical, not particularly helpful, but accurate lawyer's response: "it depends…"
To understand the current state of tax law affecting trusts and estates, it is useful to briefly review the recent significant changes in that law:
First: The concept of “portability” between spouses became the law in 2013. Portability allows married couples to combine the amounts they can leave to their beneficiaries free of estate tax (referred to as the Applicable Exclusion Amount, or "AEA"). This change effectively doubles the amount of the surviving spouse's AEA without the need to create a separate bypass trust. This was a wonderful change, which now allows surviving spouses to continue holding both spouses' combined estates in one trust controlled by the survivor until his or her death. In addition, because all of the assets are in the surviving spouse's estate at his or her death, all of the assets receive a stepped-up cost basis for capital gains tax purposes. Because the assets passing to the couple’s beneficiaries have a high cost basis, the beneficiaries can reduce or even eliminate any capital gains tax owed when the assets are later sold.
Second: The amount of the AEA became "permanent" in 2013 and was set at $5 million indexed for inflation. By January 1, 2017, the AEA had increased to $5,490,000 per person. As a result, it is estimated that less than 1% of estates had a potential estate tax issue in 2017.
Third: Congress passed the Tax Cuts and Jobs Act ('TCJA"), which doubled the AEA amount effective January 1, 2018. As of January 1, 2019, an individual can leave a total of $11,400,000 in assets to his/her beneficiaries, and couples can leave $22,800,000, without incurring any federal estate tax. However, like most tax bills passed by Congress, the TCJA has a limited lifespan. In 2025, the TCJA is set to “sunset” and return the AEA to its pre-2018 level, indexed for inflation. Michael Jones, CPA of the accounting firm Thompson Jones LLP located in Monterey, estimates the amount of the AEA in 2025 could be between $6 million and $7 million.
So, if you are single and your estate is less than $11.4 million, or married and your estate is less than $22.8 million, are you safe from estate tax? It still depends! If you are single with a net worth over $6 million, or married with a net worth over $12 million, it would be prudent to review your personal circumstances, and check with your estate planning professional, to determine if you would benefit from tax planning now to reduce the size of your taxable estate, and/or to take best advantage of the historically high AEA amount, while it lasts.
Available tax-planning strategies are beyond the scope of this article and are unique to every client. As a result, you should discuss your tax situation with your estate planning attorney. Your personal circumstances (net worth, age, health, likelihood of appreciation of assets, etc.) will affect your decisions and the advice your attorney gives you.
While no one has the proverbial "crystal ball" to know when we will die and what the tax law will be at death, we can reduce financial risk for your beneficiaries through careful analysis, to determine the best course of action, tailored for your estate.
© 2019 Noland, Hamerly, Etienne & Hoss
This article is for general informational purposes only, and should not be relied upon as a substitute for a consultation with a legal/tax professional.