Fix Your Obsolete Estate Plan

Published in Business NH Magazine (11/2/18)

The Tax Cuts and Jobs Act of 2017 can mean good news for folks standing to inherit property. Until recently, many people used various estate planning techniques to postpone or avoid the 40% Federal estate tax. However, as a tradeoff, many of these plans can result in beneficiaries receiving property that is subject to capital gains when sold. Now that a taxpayer's lifetime estate, gift and generation skipping transfer tax exemption is more than $11 million, most people should no longer need fear (and thus plan for) transfer taxes and can fix obsolete estate plans or create new ones to reduce the capital gains burden on heirs and beneficiaries. In additional, many revocable trusts created by married couples provide that separate shares are created to avoid estate taxation at the death of the first spouse. Many of these assets that are transferred when a spouse dies will not receive a "step up" in tax basis (the readjustment of the value of an appreciated asset for tax purposes) when the second spouse passes because these assets are not part of their gross taxable estate. This strategy made sense when the decedent's gross estate was larger than the lifetime exemption amount. However, that may no longer be the case with a lifetime exemption of more than $11 million.

Revocable trusts can be amended to provide more flexibility to the trustee/executor to adjust for future estate/income tax considerations when a spouse dies. In addition, many revocable trusts created and funded years ago can be easily modified or terminated to provide for estate inclusion at the death of the grantor or of a beneficiary.

Making adjustments

Because the "step-up" in basis may now be accomplished with little concern for transfer taxes, seeking ways to create estate tax inclusion has become an integral part of today's planning process. One of the first steps is trying to assess the potential transfer tax costs against the income tax savings that would arise from a step-up.

Most people are in a "free base" situation. That is, the person's assets are less than his or her lifetime exemption(s). In these situations, tax basis planning is often a primary component of an estate plan.

For example, in 1998, John died, leaving commercial real estate in a credit shelter trust for the benefit of his wife, Mary, and their children. By 2018, the commercial real estate appreciated in value to $5,000,000, but John has a low, depreciated...

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