A dramatic change to our nation’s estate and gift tax laws became effective January 1, 2018. This change increased estate and gift tax exemptions to such an extent that most decedents’ estates may never incur estate taxes. However, these increased exemptions also harbor adverse consequences for many taxpayers who have estate plans designed around traditional A/B (taxable/non-taxable) trusts.
In 1996 the estate tax credit was only $600,000; in 2002 it was increased to $1 million; and in 2010 it jumped to $5,000,000. Now, in 2018, the exemption has been increased to $11,180 million for individuals and to $22,360 million for couples. Prior to this major exemption increase, many families opted to put their post-death assets into A/B trusts structured to shield their assets from federal estate taxes. Unfortunately, these same increased exemptions can now render these estate plans obsolete. Unless updated, many A/B trust estate plans will force the creation of unnecessary post-death trusts and administration costs. Even worse, they can cause a sizable portion of a decedent’s assets to be allocated to a bypass trust that disinherits a surviving spouse. Yet another negative consequence would be the inability of those assets allocated to the bypass trust to receive a stepped-up basis for future capital gains tax purposes.
Because of the many ramifications of this latest estate tax law change, married couples, especially those in second marriages and with blended families, would do well to undertake a comprehensive review of their estate plan documents.
Note: Unless additional action is taken by Congress, at the end of 2025 these increased exemptions will revert to their 2017 levels.
© 2018 Paul J. Dunn, Arizona Estate & Trust Law, Plc
Prescott attorney, Paul Dunn, has been made a Life Fellow of the American Bar Foundation. The American Bar Foundation is a global honorary society of attorneys, judges, law faculty, and legal scholars who have demonstrated outstanding achievement and professional distinction in the legal profession. Membership in the Fellows is limited to one percent of lawyers admitted to practice in each jurisdiction of the United States and to a small percentage of international lawyers.