There has been much discussion over the last several months of how the Republican and Trump administration tax plan would affect estate planning. During the negotiations, there were discussions about eliminating the federal estate tax altogether and whether or not the stepped up basis would remain for inherited appreciated assets among other issues. When the final bill was passed by Congress, it looked very different.
Originally there was a lot of discussion and effort to eliminate the federal estate tax, which is a tax on the transfer of a deceased person’s assets. It would apply whether the property was transferred according to the terms of a Last Will and Testament, or if there was no Last Will and Testament, by intestate succession. Intestate succession is a statute in Kentucky that determines who will get the deceased’s estate when there is no Last Will and Testament. At the federal level, it will also include any life insurance over which the deceased had the ability to determine who would receive the funds (even though it never went through the estate), as well as gifts made during the three years prior to death (certain exceptions would apply) among other assets. The final version contained in The Tax Cuts and Jobs Act of 2017 left the federal estate tax in existence, but raised the amount applicable from the 2017 amount of $5.49 million to $11.2 million per estate. Estates that exceed the $11.2 million level would be subject to a 40% tax rate. It is estimated that this will apply to only .2% of the estates. Through proper Estate Planning, this will allow a married couple to pass an estate up $22.4 million and incur no federal estate tax. The Tax Cuts and Jobs Act also increased the annual amount that can be gifted without having to incur any gift tax to $15,000 per person, per donee, which depending on the size of your estate can also be a useful Estate Planning tool.
A bigger issue for Estate Planning was the possible elimination of the stepped up basis on inherited property. If the stepped up basis on inherited property had been eliminated, any appreciated property would have been taxed as a capital gain based on the recipient’s total income. For example, if an heir to an estate inherited a piece of real estate that had a cost basis or purchase price of $50,000 and a fair market value at the time of death of $200,000, there would be a $150,000 appreciation or capital gain. This gain would be taxed at a 20% rate, meaning the recipient would have a $30,000 tax bill payable to the federal government. The final version of The Tax Cuts and Jobs Act of 2017 left the stepped up basis in place.
What has not changed is the need for every adult to have an Estate Plan in place. Even though estate and inheritance taxes are greatly reduced or in some cases eliminated, every adult needs at a minimum a Last Will and Testament or Trust, a Durable Power of Attorney, and a Living Will. If you do not have an Estate Plan, then you have no control over where your estate goes upon your passing. You are never too old, you are never too young, but you can be too late when it comes to your Estate Plan.