New Tax Law Doesn’t Change Need for Estate Review

The new tax law roughly doubled the federal estate-tax exemption to about $11.2 million per person, meaning most people will not be subject to the tax. But that doesn’t eliminate the need for estate planning.

The sharp increase in the exemption amount, for example, means that old wills and trusts may be in urgent need of an update.

It’s always a good idea to review your estate plan regularly, regardless of legislative changes. Your net worth changes, you or your children get married or divorced, grandchildren are born, and old documents may no longer reflect your wishes.

One snag that many seniors are likely to find in their estate plans is that old wills and trusts using formulas tied to the federal estate-tax exemption may now have unintended consequences.

Consider this example from Colleen Carcone, director in the wealth-planning strategies group at TIAA: Let’s say you completed your estate plan in 2001, when the federal estate-tax exemption was $675,000. The plan stipulates that the amount that can pass free from federal estate tax should go to your children and everything else to your spouse.

“That might have worked in 2001, when the kids would have gotten $675,000,” Carcone says. But now the kids will receive up to $11.2 million, and “you could unintentionally disinherit your spouse,” she says.

When reviewing old trusts, you may find that their original purpose no longer seems compelling. Perhaps your estate plan says that at your death, your assets will pass into a bypass or credit shelter trust, which will pay income to your surviving spouse and ultimately pass assets to your children.

It was once common for married couples to set up such trusts to avoid wasting a deceased spouse’s unused estate-tax exemption. But portability, introduced in 2011, allows a surviving spouse’s estate to use any estate-tax exemption amount that the first-to-die spouse did not use.

What’s more, beneficiaries inheriting assets from such trusts miss out on a big tax break. When passed directly through an estate, assets such as stocks and real estate get a step up in basis to the market value on the day the owner died, so heirs pay tax only on appreciation after that date. Assets passed through bypass trusts don’t get the basis step-up.

But before you scrap these trusts, consider that they can serve purposes beyond avoiding federal estate tax, says Bernard Krooks, founding partner of Littman Krooks LLP in New York. A trust can be useful, for instance, if you live in a state with a low estate-tax exemption.

Written by Eleanor Laise, Senior Editor, Kiplinger’s Personal Finance Magazine, appearing in www.chicagotribune.com.