“Let’s consider what happens with a married couple, where the first spouse to die has a relatively small estate, which doesn’t use all the estate-tax credit. What happens when the second spouse dies, and their respective estate is more than their applicable estate-tax credit?”
The Tax Cuts and Jobs Act of 2018 temporarily doubles the allowable credit for the federal estate tax. It is $11.2 million for an individual and $22.4 million for those who are married, reports Newsmax’s recent article, “Trump Tax Law Necessitates Immediate Review of All Estate Plans.”
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. 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.
If you have an existing estate plan, work with your attorney to review your estate strategies and documentation. If you don’t have an estate plan, now is the time to put one in place that will take advantage of the new tax law.
Reference: Newsmax (April 30, 2018) “Trump Tax Law Necessitates Immediate Review of All Estate Plans”