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New Tax Law could mean big problems for your old estate plan; opportunity for 1st time planners

How Does The New Tax Law Affect Your California Estate Plan?

As of January 1, 2018, the estate tax exemption threshold was increased to $11.2 million for single people and – because of what’s called portability – $22.4 million for couples. This effectively doubles the exemption for estate, gift and generation-skipping taxes for the tax years 2018 to 2025.

What is the estate tax exemption threshold? Essentially, the estate tax exemption threshold means that any assets you possess (house, bank accounts, etc) over and above the threshold amount are subject to the federal estate tax. Any assets you possess under the threshold amount will not be subject to the estate tax. Put simply, a person who died in 2017 with $10 million in assets (and had no fancy estate planning) would pay an estate tax to the federal government on $4.51 million of those assets. This is because in 2017 the tax exemption threshold was set at $5.49 million for a single person. Thus, he would not owe estate taxes on the first $5.49 million worth of assets. Now that limit has been increased to $11.2 million. Come 2026, the estate tax will revert back to what it was previously, indexed for inflation.

Other primary aspects of the estate tax law remain the same:

  • The gift, estate and GST tax rate stay at 40%
  • Inherited Property in the deceased’s taxable estate still qualifies for a step-up in basis
  • Gifts made during your lifetime count toward the exclusion threshold amount

An estimated .2% of Americans, or 11,300 people will pay the estate tax in 2017. With the implementation of the new bill, the number will dwindle to just a few thousand estates subject to the tax each year.

What does that mean for you?

The threshold increase is a win for only a handful of the population. It does however, have consequences for many individuals with Estate Plans currently in place. 

New Tax Law Increases the Problem of Unnecessary Trusts

The new tax law has particular significance for people who created trusts in the 1990s, as well as those who set up multiple trusts more recently to safeguard assets from the estate tax.

In 1996 the estate tax credit was $600,000 and in 2002 it rose to $1 million. During this time, many families put their assets in Trusts designed to shield them from federal taxes. After all, after you accounted for a home, many families were worth more than $600,000. This constituted good estate planning.

But with the exemption limit for couples now at $22.4 million, the very same planning vehicles that were employed them will now can create long term problems if left unchanged. In fact, as of January 1, 2018 , the increase in the estate tax exemption threshold makes many trusts obsolete.

In other words, if the trust you created to shield your assets has become unnecessary, it is important to remove that part of your estate plan as soon as possible. If you or your spouse’s estate planning documents contain a Credit Shelter Trust, Bypass Trust, A-B Trust, Marital Trust or Family Trust, they will force unnecessary Trusts to be created if either of you dies. This means that instead of being free to do anything you want with your assets you may have to ask a trustee or co-trustee for permission or consent, or you may be forever yoked to the terms of the trust. Or worse – if a spouse dies your trust could force a large amount of money into a bypass trust that the living spouse cannot access. It does not matter that the law regarding the exemption threshold has changed; the original terms of the trust by law must be upheld.

On a more positive note, if you haven’t done any estate planning and you’re worth more than 5.49 (or 11 million for couples) but less than the new exemption rates, doing your estate plan just got a lot easier – and cheaper.

Estate Planning Just Got Cheaper

With the passage of the new tax bill, even fewer families will need to pay large attorney fees for complex estate plans. Individuals and families whose assets fall under the exclusion amount (less than 11.2 for single, 22.4 for couples) need only straightforward Estate Plans. This means that more people can take advantage of attorneys who offer a lower, flat rate for planning. It also means estate planning will be easier, simpler, and less stressful. 

The Bottom Line: If you have an Estate plan, now is the time to Revisit it- and your attorney – or your heirs could be left with a mess. If you don’t have an estate plan, now could be a good time to get one. 


If you have questions about Estate Planning, call our Trust and Estate Law Firm at 925-322-1795 to schedule an appointment. 

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