It is unknown whether this amount would be per taxpayer or per married couple. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed. An exemption may still apply for assets transferred to a surviving spouse, deferring the tax until their death.
The current system vs. Trump’s proposed changes
The Taxpayer Relief Act of 2012 instituted a $5 million combined estate and gift tax exemption and generation-skipping tax exemption, indexed each year for inflation. In 2017, these exemptions were increased to $5.49 million with a tax rate of 40 percent. The Act also permits portability, which is the transfer to the surviving spouse of any unused estate tax exemption if a valid election is made.
Under Trump’s proposed plan, tracking the cost basis beyond the decedent’s death would be required. This often creates a tremendous amount of recordkeeping since cost basis can be difficult to track, especially for older property, reinvested dividends, partnership interests, and real estate assets. Under today’s system, a decedent’s assets are “stepped-up” or “stepped-down” to fair market value at the date of death (or, if applicable, six months later), which resets the basis. The original cost basis no longer applies except for items that have deferred income such as taxable retirement accounts and annuities.
Currently, there is also an annual federal gift tax exclusion of $14,000 per donee ($28,000 if a married couple elects to “gift split”). This is separate from the combined lifetime estate and gift tax exemption. It is unlikely the gift tax would be eliminated, although the rules could be modified.
4 key estate planning strategies
In light of tax reform uncertainty, here are four considerations for an individual or married couple to effectively structure an estate plan:
- If your estate is less than $5.4 million (or $10.98 million for married couples), don’t assume that you do not need an estate plan. Individuals or married couples with less than $5 million or $10 million in assets may have more challenges than a larger estate. Complexities may arise from having a closely held business, a blended family, a special needs child or a number of other factors. In addition, estate planning may be done for other reasons such as asset protection against divorce, creditors and lawsuits.
- Have your current estate planning documents and estate plan reviewed by a qualified estate planning advisor. It is critical to understand the current “state of your estate.” Do you know and understand the important terms of your estate planning documents, how your estate plan is structured and what would happen upon your death? A simulation of the events that would occur upon your death can provide clarity and identify those areas that need your attention.
- Confirm there is flexibility built into your estate plan and determine whether your documents need to be updated. Flexibility within your documents may protect against future changes in the law and provide your spouse and/or heirs with important options. Clauses and formulas commonly used in the past could potentially have very different or disastrous results under the current or future transfer tax system.
- Do not be paralyzed to make decisions or wait until the law is “settled.” Your current plan may not be in line with your goals and desires, and tax laws will change several times throughout your lifetime.