Impact of New Tax Laws on Estate Planning Financial Accounting in Springfield Missouri
The Tax Cuts and Jobs Act doubled the estate and gift tax exemptions. This is the amount you can gift during your lifetime or give to heirs at your death without paying federal estate and gift taxes. For 2020, the exemption is $11.8 million per individual. Married couples enjoy twice the exemption.
These reforms are scheduled to sunset in 2026, reverting the exemptions to their pre-2018 level of $5 million, plus inflation adjustments. While no one can predict what changes new politicians may bring, taxpayers may want to get ahead of any changes by making large gifts now.
The IRS has clarified that individuals planning to make large gifts can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases. If the exemptions revert to lower levels, those who have not made large tax-free gifts will have missed an important opportunity.
By gifting now, future income and appreciation can be removed from the donor’s taxable estate. By using trusts, gifts can be structured to give the donor indirect control and access to the gifted funds.
Review Trust Funding Strategies
If you haven’t reviewed your estate planning documents since the tax reform, it’s time to do so. Provisions in your will or revocable trust that made sense when the estate tax exemption was lower could cost your heirs substantial tax dollars.
Many estate plans include credit shelter trust strategies which allow married couples to take full advantage of state and federal estate tax exclusions. This trust strategy is often structured so that upon the passing of the first spouse, specified assets pass to the credit shelter trust. These assets then flow to the surviving spouse, but due to the nature of the trust, the surviving spouse never actually owns or takes control of the assets. So the trust assets are not included in the surviving spouse’s taxable estate.
For an estate smaller than the new federal estate tax exclusion amount, such a strategy has the potential to transfer the entire estate to the credit shelter trust, which could limit the surviving spouse’s flexibility and direct access to the funds.
In states with a state estate tax, having an entire estate pass to a credit shelter trust may also generate state estate taxes at the first spouse’s death, unless the trust language limits the assets transferred to the lower of the state or federal estate tax exclusion. It’s important to review your estate planning financial accounting with your tax and legal advisors to determine if this strategy still makes sense.
Regardless of what happens in the future with the estate and gift tax exemptions, proper estate financial planning is still important. There are several non-tax benefits associated with keeping your estate plan up to date. Ultimately, you want to ensure that your assets go to the individuals or organizations you want and stay with them. Here are just a few reasons to make sure your estate plan is in good shape:
Avoid Probate With Financial Accounting
By creating and funding a revocable trust, your estate can avoid probate, or at least minimize the assets that are subject to probate. This can accelerate the transfer of assets to your family and can reduce or eliminate court costs and attorneys’ fees.
Planning for Incapacity
A revocable trust also provides a mechanism for a family member or other trusted person to manage the trust if you are incapacitated. The successor trustee can make investment decisions and pay your bills while you are unable to do so, and this may avoid a court-appointed guardian.
Protect Your Family from Creditors and Predators
Estate planning often includes the creation of one or more trusts to protect your family. The trusts can be created and funded while you’re alive through gifts, or created and funded upon your death through your will or revocable trust. Either way, the trusts can be structured to protect assets from claims by your family’s creditors and from their spouses in the event of divorce.
Tax reform did not eliminate the need for estate planning. But the new rules may be grounds to consider additional gifting and a review of your existing estate planning documents. If you would like to learn more about estate planning financial accounting in Springfield Missouri, please consult your tax advisor at Schultz, Wood & Rapp.