When the Tax Cuts and Jobs Act went into effect, many clients and advisors assumed that their days of worrying about the estate tax were largely over. Not so fast.
The big news was that the Tax Cuts and Jobs Act doubled the federal estate tax exemption to $11.18 million per person (and $22.36 million per couple, with portability). This enormous exemption increase gave many Americans who are in the highest of all tax brackets a reason to cheer. However, in reality, few wealthy Americans ever pay the tax. However, according to “Beware the Estate Tax Cliff,” an article appearing in Wealth Management, it’s not all good news.
For one thing, such a huge increase means that many estate plans that factor in the old exemption in complex ways, have been thrown out of whack. Many wills were created before the exemption increase and some provide directions that no longer work. If the will says, “send to my credit shelter trust an amount equal to the federal exemption,” that means $11.18 million is now headed to a credit shelter trust. That might not be what the clients were expecting to happen.
It’s not hard to understand. Plans that were perfectly balanced with a $5.4 million exemption are now being upended by doubling that amount.
Let’s also not forget about state estate taxes, which is what most people do pay.
The Act has no bearing on state estate taxes. In the past few years, many states have passed laws to ensure that the state estate tax exemption matched the federal one—before it was doubled. As a result, there is now a $5 million gap between federal and state estate tax exemptions. A plan that centers totally on leveraging the new larger federal exemption, could end up exceeding that state exemption amount.
Only about 14 states implement estate taxes for deaths after Jan. 1, 2018, and the state estate tax rates are usually much lower than the 40% federal rate. However, you still need to be aware of the specific rules and exemptions that apply in your state. You don’t want your heirs to get hit with an unexpected tax bill.
If you live in New York, a word to the wise: New York is the largest state that still levys a state estate tax. Not only is there still a large gap between the New York State estate tax exemption and the federal one, but New York has an added wrinkle of applying the exemption differently.
An estate is normally taxed based on a percentage of the amount by which it exceeds the exemption. That initial exemption is almost always tax free. However, New York implements a “cliff rule,” where if an estate exceeds the exemption by more than 5%, the exemption is effectively ignored, and the entire estate gets taxed. If you’re even 5% over, you’re in for it. New York also doesn’t have portability. With a top rate of 16 percent, that’s a nasty tax surprise.
Whether you live in New York or Kansas, talk with your estate planning attorney about how the new federal exemption impacts your estate plan and whether any changes need to be made before the end of the year.
Reference: Wealth Management (Sep. 17, 2018) “Beware the Estate Tax Cliff”
“On the threshold of retirement, we finally decided to quit thinking we could self-prepare the requisite documents. We had previously had only a very simple will. We needed the necessary legal (including updated will) & health care docs but didn’t want to deal with the time & complication of legalese. Cindy made the process relatively painless. She took the time to explain and answer questions without trying to upsell services. We were done in 2 meetings plus the reading of emailed drafts. In addition to preparing the documents, Nelson Eldercare will be there when our adult children need advice on executing the plans we’ve put in place.So glad it’s behind us and would recommend Cindy and her helpful staff.”
Cindy and her company treat their clients like family. Nelson’s offers clear, direct, and honest guidance in planning for your families security and future. No one wants to actively sit down and make these decisions, but Nelson’s makes this process seamless. I was so impressed with their willingness to answer all questions big or small. So glad I made the decision have them help my mom and dad and now me. You can’t go wrong with Nelson’s Elder Care Law.
The very best elder law attorney and staff anyone could ever ask for! I have referred a number of clients to Cindy and she never disappoints. She is kind, caring, and extremely thorough in making sure everything is completed as it should be. I highly recommend Cindy for anyone needing lawyer services; she truly goes above and beyond for every client she helps and has had a huge impact in so many peoples’ lives. Thank you, Cindy and staff, for everything that you do- I’m so glad to know you!
I heard Cindy’s presentation at a Senior Luncheon at my church, and was very impressed. She helped my daughter and me understand many aspects of elder law. Josh has also been very helpful in my planning to enter an independent living situation . I have told many friends about them.
Cindy and the Nelson Elder Care Law team are trustworthy and helpful. They are the experts in elder care law. At Leaf Cremation, we entrust our families to the care of the Nelson team when their services are needed.