How 2018 Tax Changes May Affect Your Estate Planning

How 2018 Tax Changes May Affect Your Estate Planning

By |2018-10-31T13:36:16+00:00Monday, November 05th, 2018|Estate Plan|0 Comments

Federal Estate Tax Exemption Doubled

California does not have estate or inheritance tax, but the federal government taxes estates of the very wealthy. The Tax Cuts and Jobs Act passed at the end of 2017 doubled the exemption of $5.5 million to 11 million for an unmarried person, and the exemption is now $22 million for married people. The double exemption went into effect January 1, 2018, and it will stay in place until the end of 2025 when Congress may extend it or let it revert. If Congress does not extend the exemption rate, after adjustments for inflation, it will probably be about $6 million for individuals and $12 million for married couples after 2025.

Who is Affected by the 2018 Federal Estate Tax Changes

Most people are completely unaffected by this tax change. Fewer than 11,500 estates would have been subject to filing a federal estate tax return before the tax exemption was doubled. Under the new law that doubles the exemption, less than 4,000 estates will need to file each year. However, when valuing your estate, bear in mind that California homes have appreciated 31.75% on average in the last 10 years, so you may unexpectedly find yourself a beneficiary of the new exemption rate.

Step-Up-in-Basis Rule Unaffected

The change in the estate tax law has no effect on the very advantageous step-up-in-basis rule. It allows inheritance without paying capital gains tax on appreciation of property from the time the property was acquired by the person who passed away. Your capital gains basis is not the date when the person from whom you acquired the property acquired it themselves, but rather the day they died.

Gifting May Be the Smartest Move

The exemption applies not only to estates but also to making lifetime gifts. There is no guarantee that Congress will extend the doubling of the exemption after 2025. Therefore, if your circumstances permit, it makes sense to use the exemption for gifts rather than counting on the double exemption still being in place when you die.

Review Your Trusts

Trusts that were set up to avoid the federal estate tax may now be outdated under the new tax law. However, it has no effect on irrevocable trusts which may not be changed under law. If your property value is in excess of $5.5 million, you may want to have your local California estate planning attorney review your trusts in light of the recent change in exemptions.

About the Author:

Bridget Mackay is a Petaluma estate planning attorney who has been practicing law since 1996. She is a member of the Sonoma County Bar Association, California State Bar Association Trust and Estates Section and on the Board of the Sonoma County Women in Law. She also sits on the Board of the Cinnabar Arts Corporation in Petaluma. Connect with Bridget on Google

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