How the 2017 Tax Act Changes Estate Planning
By: Barry E. Haimo, Esq.
March 22, 2018
The 2017 Tax Act is a game-changer in many ways – and estate planning is no exception. Particularly if you have a large estate, you should revisit your plan to ensure it still maximizes the amount that will pass down to your heirs.
Here are a few of the changes that impact estate planning starting this year.
Estate Tax Exemption
The change getting the most publicity is the temporary doubling of the estate tax exemption for individuals dying in 2018 through 2025. Those with large estates should revisit their estate plans, because they may be based on irrelevant formulas, meant to make the most of the previous $5 million exemption instead of the new $11 million exemption.
In the past, the goal in estate planning for the very wealthy was to reduce the size of the person’s estate at death in order to maximize how much would pass to heirs. Now, you may not need to do that – or you may not need to reduce it as much.
You may be able to save money by making use of non-grantor trusts.
Previously, grantor trusts had an advantage, but under the new law, many can save money with non-grantor trusts. They can be used in creative ways, though if not used properly, the trust itself is taxed at a compressed and therefore adverse tax rate.
Pass-Through Business Income
A pass-through is a business that doesn’t pay corporate incomes taxes. Instead, the owners pay taxes on their personal income tax return. This includes sole proprietorships, partnerships, and S-corporations.
The 2017 Tax Act now allows these types of businesses to take a deduction of up to 20% to reduce the effective tax rate on these entities. This 20% reduction is also available to trusts and estates that own an interest in a pass-through business.
In order to make the most of this new benefit, you may want to make changes to how you categorize your expenses or earnings going forward.
Of course there are significant exceptions to this 20% deduction, such as for attorneys, accountants and other service providers. Fortunately, there are exceptions to the exceptions though. Talk to a qualified tax attorney and CPA to understand the new tax laws and how they may be of benefit to you and your business.
Stepped-up Basis at Death Rule
When you die, the fair market value of your property on the date of your death is used to determine gain or loss upon sale of the property. However, if you give away that property before you die, the cost basis is the value of the asset when you purchased it, i.e. a “carry-over basis”.
For example, if you purchase something for $500 but it is valued at $10,000 at your death, the item can be sold for $10,000 without incurring a taxable gain. However, if you give that same item away before you die and the gift recipient sold the gift, the recipient would incur a taxable gain of $9,500.
So, if your estate is not subject to an estate tax, then it no longer makes sense to give away appreciated property before you die since you will simply create taxable income for your heirs.
Instead, if you’d like to give away assets before you die, you should select high basis assets to take advantage of the stepped-up basis at death.
These are just a few of the changes from the 2017 Tax Act that may impact your estate plan. Contact your estate planning attorney to better understand your particular situation.
Barry E. Haimo, Esq.
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