Time to Review Your Estate Plan

On Behalf of | Dec 14, 2018 | Firm News |

With the 2019 new year brings a new federal estate and gift tax exemption of $11,580,000. As you may be aware, recent tax reform legislation impacts not only your federal income tax but also other taxes potentially affecting your estate plan, such as estate, gift, and generation-skipping transfer taxes. With the tax reform in effect in 2018, the federal estate and gift tax exemption was doubled to $11,180,000 per individual, which increased this year.

The dramatic increase in the estate and gift tax exemption may have a large impact on your estate plan. When the estate and gift tax exemption was much lower, revocable trusts were drafted with different considerations in mind. The effect they have today, however, is they may not afford you the best tax treatment in the areas of estate, gift, generation-skipping transfer tax, income tax, and California real property tax.

For example, when the federal estate tax exclusion was only at $1,000,000, estate planning professionals drafted estate plans to minimize their clients’ estate tax based on that limitation. The economic conditions at the time, particularly in the Silicon Valley, were also much different. Real property has since rapidly appreciated, causing exponential growth of the estates that were once modest. The larger exemption has shifted the fixation on minimizing estate tax to more careful planning regarding the income and property tax implications of one’s chosen disposition. Families want to pass down their appreciated real property without reassessment. They want to get the “step up” in basis on their property to avoid devastating capital gains tax. Trusts should therefore be drafted to allow such flexibility without being bound to the confines employed during a different era of estate planning.

Additionally, outdated estate plans may impose unnecessary administrative burdens for your successor trustees and family members. Many trusts that were established when the federal estate tax exclusion was lower called for the creation of a subtrust at the death of the first spouse to utilize their exemption amount. In many cases today, the high exemption does not necessitate the creation of a subtrust because the exemption of the surviving spouse alone is ample to cover the married couple’s combined estates. Still, if the couple’s trust calls for the forced split, the agreement usually must be honored. This means that an irrevocable subtrust will be created and require annual tax returns. And because it is irrevocable, it places limitations on the surviving spouse’s ability to access the trust funds. If this situation is not appropriate for you and your family, you ought to seek review of your revocable trust to confirm how it will be administered upon your death.

Reviewing your trust is important not only when you need to change your trustee or the disposition of your assets. Considering the current federal estate and gift tax exemption, you should review your estate plan with an estate planning professional to ensure that your trust structure continues to satisfy your tax and family objectives.