The tax law signed in 2017 doubled the federal estate tax exemption, meaning the vast majority of estates won’t have to pay federal estate tax. But that doesn’t mean you should ignore its impact on your estate plan.
The law doubled the federal estate tax exemption to $11.18 million for individuals and $22.36 million for couples. (These figures are indexed for inflation, so in 2019 they are $11.4 million and $22.8 million, respectively.) The tax rate for the few estates still subject to taxation is 40 percent.
Although most estates won’t pay any federal estate tax, you should review your estate plan to make sure the changes won’t have other negative consequences and to see if there is a better way to pass on your assets.
For example, one common estate planning technique when the exemption was smaller was to leave everything that could pass free of the tax to the decedent’s children and the rest to the spouse. If you still have that provision in your will, your kids now could inherit your entire estate while your spouse would be disinherited. As recently as 2001 the federal exemption was a mere $675,000. Someone with an $800,000 estate who hasn’t changed their estate plan since then could see the entire estate go to their children and none to their spouse.
Another consideration is how the new tax law might affect capital gains taxes. When someone inherits property, the property is usually worth more than it was when the original owner purchased it. If the beneficiary later sold the property, huge capital gains taxes could apply.
Fortunately, when someone inherits property, the property’s tax basis is “stepped up,” which means the tax basis would be the current value of the property. If the same property is gifted, there is no “step up” in basis, so the gift recipient is subject to capital gains taxes. Previously, in order to avoid the estate tax you might have given property to your children or to a trust, even though there would be capital gains consequences. Now, it might be better for your beneficiaries to inherit the property.
However, many states have their own estate tax laws with much lower exemptions, so it is important to consult with your attorney to make sure your estate plan still works for you.