The Tax Cuts and Jobs Act of 2018 temporally doubles the allowable credit that can offset the imposition of the federal estate tax.
An $11.2 million taxable estate for an individual or a $22.4 million taxable estate for people married is, effectively, estate-tax free.
Let’s consider what happens with a married couple where the first spouse to die has a relatively small estate which doesn’t use all the estate-tax credit. What happens when the second spouse dies and their respective estate is more than their applicable estate-tax credit?
Fortunately, recent prior changes in the estate tax law created a complicated mechanism — called portability — so the unused estate-tax credit from the first spouse to die can be used in the second spouse’s estate. It’s an election and not automatic.
This election holds out the tempting promise that something like 99% of the estates of U.S. persons planning to avoid estate tax may no longer be the primary concern.
For many estates, this may be true. But for many others, estate-tax planning remains the major factor in creating an effective estate-planning strategy.
For estate plans drafted and implemented before 2018, it should be obvious those arrangements, and their documentation, needs review.
Standard-estate plans for married couples before the 2018 increase in tax exemptions and before portability involved the use of a credit-shelter trust and a marital trust to zero-out most estates on the first spouse to die. Commonly called the A-B trust system.
The credit shelter trust holds assets equal to the estate tax credit. (Now $11.2 million but previously $5.49 million.)
The rest of the estate funds the marital trust and avoids taxability in the first estate. It is, however, taxable in the estate of the second spouse to die if that estate is over its estate-tax exemption.
The advisability of the credit shelter-marital trust plan structure came under some question after the enactment of portability of the estate-tax exemption.
Under the tax environment with the increased tax exemption and portability, many professional tax planners consider that using the marital trust may not be optimal for many estates.
Why not use the marital trust?
The reason is that for federal estate-tax purposes, using the marital trust is complex and restrictive. It involves sometimes using additional mechanisms as the qualified terminable interest property (QTIP) trust provisions.
Then there are complicated situations such as involving a second or third wife but children from the earlier relationships. Not so simple.
There are other intricate considerations, for example, involving spouses who are nonresidents, retirement planning, charitable planning, generation-skipping, and income-tax planning issues.
Income tax and state tax loom large as serious estate-planning concerns.
In practice, the largest value in a taxable estate usually consists of significant investments, such as real estate, or closely-held businesses.
Extensive changes in 2018 Tax Cut and Jobs Act, dictates, for example, considerations for tax planning purposes the impact of the new lower tax rate (21%) on corporations, and the 20% deduction on the active business income of pass-thru entities, like LLCs, which hold investments.
Another notable complication, among many others, is the inherited tax basis on the property funding the credit shelter or marital trust, and its projected tax impact on sale.
Will the property get a stepped-up or a carryover basis?
Repealing the estate tax would make all this a lot easier on the government and taxpayers.
The Family Business Coalition has written a letter of support to Representatives Jason Smith and Sanford Bishop who have introduced the Death Tax Repeal Act.
They pointed out that the estate tax only raises approximately one-half of 1% of annual tax revenues.
But more realistically, as often noted by the Joint Committee on Tax, the estate tax is a net revenue loser for the government.
Politically, it appears the majority of tax-paying voters support estate tax repeal.
The bottom line is that the estate tax serves no useful governmental tax function while doing nothing except peeving voting taxpayers and burdening the economy.
Until repeal, the existing draconian estate tax system is not going away.
For those with existing estate plans, the action to take right now is a thorough review of your estate strategies and their documentation.
If your estate is not planned to minimize tax don’t worry, the government has one for you already in place.
Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.
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