Use It Or Lose It: Why You Should Update Your Estate Plan After Tax Reform
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By Jim Wisdom, CFP, CEPA
The Tax Cut and Jobs Act of 2017 effectively doubled the estate tax exemption. Therefore, many wealthy Americans believe there is no need to update their estate plan in the near future. Are they right? According to Bruce Givner of Givner & Kaye, a respected Los Angeles-based tax law firm, the answer is no for a number of reasons.
“Use It Or Lose It”
Mr. Givner offers a number of reasons why affluent individuals should not be lulled into a false sense of complacency regarding their estate tax planning and the new tax law. Here are some of the key reasons why it would behoove you to consider a review of your estate plans in 2018:
1. It’s Temporary – This change is only effective from 2018 through 2025. If you don’t use the increased exemption, it will be lost.
2. Elections – Another unknown is trying to predict the results of a future election between now and 2026. There will be elections in 2018, 2020 (also for President), 2022 and 2024 (also for President). If the party not in power takes over control, the exemption is almost certainly going to be reduced sooner than January 1, 2026.
3. Inflation – The longer a person waits, the more inflation will be included in the value of the assets in one’s estate. Conversely, if an individual uses his or her exemption now, all future growth of the assets that fall under the exemption amount are not subject to estate taxes.
4. California Estate Tax – Howard Jarvis, hailed for his role in Proposition 13 (property tax), also lead the move to eliminate the California inheritance tax, which was repealed in 1982. As noted by Givner & Kaye, “there is a move to put a proposition on the November, 2020 ballot to impose a CA estate tax. The tax will be 15% for estates over $3,500,000, rising to 22% for estates over $5,490,000. That means in 2026, when the federal exemption is $6,500,000, the estate tax rate over $6,500,000 will be 62%!”
5. Use It And Keep It – One question is “what is the appropriate way to use this extra exclusion amount?” With thoughtful planning, there are ways for the parent to remove assets from their taxable estate while maintaining some access to both the assets and income if needed.
6. Moderate Size Estate – Ric Edelman, Financial Advisor and author of the new book “The Truth About Your Future: The Money Guide You Need Now, Later and Much Later” states that people are understating their longevity ( and thus the long term growth of their estate). Due to significant advances in medicine, Edelman recommends that couples assume that at least one of them will live well beyond age 100. For this reason, affluent Americans are likely to significantly understate the long-term growth in their estate. Using the Rule of 72, an estate that grows 6% per year will double every 12 years. So, that means a 70 year old man with a $5 Million estate who lives to age 106 will have a $40 Million estate at his death.
7. Estate Tax vs. Income Tax – Givner & Kaye notes there is a natural tension between having assets (i) excluded from the estate to save estate taxes and (ii) included in the estate to give heirs a step-up in basis. Normally the goal is to save estate tax because:
(i) a 40% estate tax on 100% of the asset is greater than a 33.3% or 37.1% tax on less than 100% of the asset (virtually every capital asset has some basis).
(ii) the estate tax is due on a specific date (nine months after death) whereas a capital gain tax is voluntary: the heirs never have to sell. If the heirs want to dispose of the asset, they have a variety of ways to do so without incurring a capital gains tax.
If estate tax is not the overriding issue, there are certain types of assets to consider including in the surviving parent’s estate. Conversely, there are certain types of assets that should not be included in the surviving parent’s estate.
8. IRS Form 706 Planning – With proper planning, the federal estate tax return need not be filed. All that is needed is the time and willingness to do the planning.
In summary, for the myriad reasons cited above, affluent individuals should consider a review of their estate plans up until 2026.