Estate Planning Check Up and the New Tax Laws

Estate planning tax reform

The Tax Cuts and Jobs Act of 2017 enacted the most sweeping changes to the federal tax code since 1986. Many people assume that due to the increase in the basic exclusion amount (BEA) to $11,180,000 per individual, only the wealthiest need now estate planning. That is just not true!

Certainly, many fewer federal estate tax returns will be required to be filed. However, it is still important to periodically review your documents and your estate plan.  Most clients should review their existing wills and trusts. Particularly where a formula bequest was incorporated, the estate plan must be reviewed to ensure consistency with the client’s legacy goals.  This is due to the increase of the BEA.  The BEA functions like a sponge to limit or prevent a decedent from any federal estate tax liability at death. The BEA soaks up the decedent’s aggregated lifetime gifts and the assets remaining in the decedent’s estate at the moment of death, allowing the donor’s wealth up to the BEA limit to be transferred free of federal estate and gift taxes. Beyond the BEA, the estate will incur federal estate transfer tax liability. When the BEA was significantly lower, it was very common for estate planners to draft formula bequests, which allocated all of the decedent’s assets up to the decedent’s basic exclusion amount, to a “credit shelter trust” for the benefit of the surviving spouse and/or the descendants of the decedent. The remaining assets would pass outright to or in trust for the surviving spouse. With the doubling of the BEA and with credit shelter trusts which do not name the surviving spouse as a trust beneficiary, those estate plans will now disinherit the surviving spouse, and the surviving spouse will then be entitled to a one-third elective share of the decedent’s augmented estate in New Jersey.  The solution is to update the estate planning now, possibly with a disclaimer formula.  The new law sunsets on December 31, 2025.

At least until the new law sunsets, under the current regime, family limited partnerships remain a viable planning strategy, with the possibility of discounts for lack of marketability and lack of control. Trusts will continue to be useful for non-tax reasons, including privacy by avoiding the probate process, creditor protection, curbing spendthrift children, centralizing asset management, fostering family harmony through controlled asset disposition, and preserving a fund for a special needs beneficiary while protecting the beneficiary’s Medicaid and SSI eligibility.

Questions? Let Jane know.

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