In addition to the magnitude of changes the Tax Cuts and Jobs Act has delivered to taxpayers everywhere, the new law also zeroed in on the way estates and trusts are taxed. Needless to say, these changes are sure to alter the way you look at your long-term financial planning and the legacy you hope to leave behind. Keep reading to find out about the estate and trust provisions included in the Tax Cuts and Jobs Act.
Read Also: Federal Tax Reform and the Possible State Tax Implications for your Business
Estate Tax Exemption
After careful consideration, the Tax Cuts and Jobs Act will keep the estate tax, gift tax and generation-skipping transfer tax intact. Actually, the major change in this area is that the estate and gift lifetime exemption amount has doubled to $11.2M/person and $22.4M/married couple. This money-saving provision will impact the estates of those who pass away after 2017. Additionally, the step-up (or step-down) in basis – the readjustment of the value of an asset for tax purposes upon inheritance – is still applicable.
After 2025, the exemption will drop back to the pre-tax reform rate of $5.6M per person (indexed for inflation to 2025).
IMPORTANT: At first spouse’s death, Form 706 must still be filed to elect portability of a deceased spouse’s unused exemption (DSUE). However, it’s still unclear as to how the IRS will handle the DSUE if the first spouse dies before 2026 and the second to die is 2026 or later. Stay tuned for additional guidance.
Primary Takeaways
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- Just because the exemption has doubled and you probably won’t have to deal with estate tax in the very near future doesn’t mean you should ignore the importance of estate planning. Without a proper plan (and completed documentation) the state will take it upon itself to decide how your assets will be dispersed.
- If you haven’t already, now is a great time to review your existing estate plan documents to see what kind of impact the Tax Cuts and Jobs Act will have on your estate. Older documents will not properly reflect the impact of the higher exemption amounts. You should be diligent when it comes to keeping these important documents up to date.
- Married couples should always consider filing the estate tax return at first spouse’s death to secure portability of the DSUE – nobody truly knows what tomorrow has in store. Additionally, if the estate tax exemption is allowed to sunset or future administrations make changes, you could be left holding the short end of the stick. Filing Form 706 is just another good way to protect your hard-earned money and the impact it could have on future generations.
Estate and Trust Income Tax Rates
Estates and trusts will still follow a set of tax brackets; however rates have been altered through 2025.
- The current 15 percent rate will be reduced to 10 percent.
- The 25 percent and 28 percent brackets will go to 24 percent.
- The 33 percent bracket will increase to 35 percent.
- The current maximum 39.6 percent bracket will decrease to 37 percent.
| If taxable income is: | Then income tax equals: |
| Less than or equal to $2,550 | 10 percent of the taxable income |
| Greater than $2,550 but less than $9,150 | $255 plus 24 percent excess over $2,550 |
| Greater than $9,150 but less than $12,500 | $1,839 plus 35 percent excess over $9,150 |
| Greater than $12,500 | $3,011.50 plus 37 percent excess over $12,500 |
Many, if not all, eliminated itemized deductions that impact individuals will also impact trusts and estates. We’re still waiting for additional IRS guidance to determine if any miscellaneous itemized deductions will be allowed for trust and estate purposes. .
Electing Small Business Trust Provisions
Finally, changes were made to electing small business trusts (ESBTs). Now, an individual considered to be a nonresident alien is allowed to be a potential beneficiary of an ESBT.
Primary Takeaways
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- Trusts and estates still may face higher income taxes even with the reduced rates because of the eliminated deductions.
- At this time, it is still unknown how these changes will be applied to trusts.
- If you have an ESBT and a nonresident alien was excluded from becoming a beneficiary, you should revisit the planning document.
The Bottom Line
While the Tax Cuts and Jobs Act appears to mean good news with regard to estate, maintaining an ongoing planning strategy remains essential to preserving your wealth long after you’re gone. Continue to discuss your plans with your attorney, accountant and other advisors to be sure your assets are delegated appropriately and that your final wishes are carried out. If you let the state decide for you, it could be costly.
Email Rea & Associates to learn more about changes resulting from the Tax Cuts & Job Act.
By Inez Bowie, CPA, CSEP (Marietta office)