Estate Planning After Tax Reform
By Jennifer Rossettini, CFP®
It has been a little over a year since the 2017 Tax Cuts and Jobs Act was signed into law. Although many of us do not yet know how the changes will affect our personal income tax returns this year, there is some certainty as to how estate planning and estate taxes are affected – at least until 2026, when the new and higher estate tax exemption will revert to 2017 levels. For now, the estate and gift tax exemption is $11.4 Million per individual. This means that a person can gift or bequeath up to $11.4 Million without incurring an estate or gift tax. What did not change with the Act are the rules involving income tax basis for gifts and inherited property. What this means is that the donor of a lifetime gift of an asset also transfers their tax basis in that asset to the donee. On the other hand, a decedent’s gift at death causes the basis to be stepped up (or down) in the hands of the heirs to the fair market value as of the date of death. Although roughly 99 percent of Americans will not owe a transfer tax, careful planning is needed to ensure their loved ones do not incur significant income taxes when they sell property they receive as a gift or inheritance. Careful planning, or planning changes, could also be needed to unwind some of the estate tax planning techniques that were written into older estate plans.
For example, many estate plans for married couples drafted before 2010, when the federal estate and gift tax exemption ranged from $600,000 in 1997 to $3.5 Million in 2009, included provisions for the creation of a “credit shelter trust” (sometimes referred to as “family trusts” or “bypass trusts”) upon the first spouse’s death. In order to preserve the first spouse’s exemption, the first $600,000, for example, of the deceased’s spouse’s $2 Million estate funded the credit shelter trust, and the balance of $1.4 Million passed to the surviving spouse. In 2019, that same $2 Million estate would pass entirely to the credit shelter trust, leaving nothing within the control of the surviving spouse. Not only that, but property held in credit shelter trusts generally does not receive a stepped-up basis when the surviving spouse dies. This will likely cause the descendants to have to pay income tax on capital gains from the subsequent sale of assets.
Although there are some good non-tax reasons for having a credit shelter trust in place, it is worth the effort to have older estate plans reviewed to make sure this approach still meets your needs. If the first spouse has already passed away and you find yourself with a funded credit shelter trust, there are some options for unwinding the otherwise irrevocable credit shelter trust. For example, depending on the terms of the Will or Trust giving rise to the credit shelter trust and the intent of the deceased spouse, the credit shelter trust can be rescinded as long as all of the beneficiaries of that trust agree and/or a court order is obtained.
As with any significant changes in the law or in life, it is important to dust off that estate planning binder and have your documents reviewed by an experienced estate planning attorney.
Ask Kit Kat: Boy and Dog Reunited
Hook Law Center: Kit Kat, what can you tell us about the boy from North Carolina who has cancer, is now in Utah for treatment, and was reunited with his dog recently?
Kit Kat: Well, this is a feel-good story, if I ever heard one! Perryn Miller is an 8-year old boy from North Carolina who was visiting family in Salt Lake City, Utah over the holidays. While in Utah, Perryn experienced some extreme headaches. After a trip to the emergency room, it was discovered that Perryn was suffering from stage 4 glioblastoma, an advanced form of brain cancer. He had surgery right away, but the family has chosen to stay in Utah for more treatment. All was going well there, but Perryn was heartsick about not having his 8-month old German shepherd named Frank with him. His grandmother who lives in Spotsylvania County, VA, which is south of Fredericksburg, VA, sought help on Facebook about the logistics of transporting Frank to Utah, so Perryn and Frank could be together.
To the rescue came Bob Reynolds of Ladysmith, VA. He didn’t know the Miller family, but he wanted to help. Bob’s working history had included being a long-haul truck driver and a summertime ranger at Yellowstone National Park. The thought of a long distance trip did not daunt him. So he set out on Jan. 3, 2019 at 4:30 AM from Ladysmith and arrived in NC at 10 AM to pick up the dog Frank. 52 hours later (Jan.5), they had made it all the way to Salt Lake City! Bob said Frank was the perfect rider. He played with his toys or napped, and if he had to go to the bathroom, he’s nudge Bob’s right arm. When the duo drove into the driveway of the home where Perryn and his family were staying in Utah, Frank walked right up to the front door, like he’d been there hundreds of times. When the Millers opened the door, Frank “just went crazy,” according to Bob. Bob has even volunteered to take Frank back home, when the time comes they feel they can return to North Carolina. Stay tuned to this developing story. (Adele Uphaus-Conner, “Man reunites dog with boy sighting cancer,” The Free Lance-Star as printed in The Virginian-Pilot, Jan.21, 2019 p,3)