TAX CHANGES and YOUR ESTATE PLAN FOR 2019
By Juli Findling, Paralegal
Changes in life circumstances or personal future goals are great reasons to revisit your estate planning strategy. However, recent tax reforms have presented a whole other set of variables that may make NOW the time to schedule your estate planning checkup. Below is a list of important matters you may need to consider:
- INCREASE IN FEDERAL ESTATE AND GIFT TAX EXEMPTION (2018-2025)
This major tax code change allows for the transfer of up to $11.4 million per individual ($22.8 million per married couple, also adjusted for inflation each year) in 2019, tax-exempt, – creating the opportunity to protect nearly double the amount of wealth from taxation down the road. Proper planning, drafting and filing necessary elections are key to taking advantage of this opportunity.
For example, in 2019, the decedent of a married couple can leave his or her entire estate to a spouse, free from federal estate-tax (because of the unlimited marital deduction) AND pass along his or her unused $11.4 million transfer exemption. If the decedent’s spouse then also passes away prior to 2026, the second spouse to die would be able to leave up to a total of $22.8 million to their children and/or other beneficiaries, free from federal estate tax consequence.
- CHANGES TO CLAWBACK PROVISIONS
The IRS has recently promised not to impose a “clawback” provision to monetary gifts that are greater now than exemption limits may be later. For example, if a single person gifts up to their $11.4 million exemption limit before 2026, he or she won’t have to worry about later tax liability, even if they were to die after the exemption reverts back to a lower limit.
- IRA INHERITANCES
A spousal beneficiary can elect to roll over their inherited IRA into his or her own IRA, an inherited IRA, or an IRA in their own name, with the option to wait until age 70 ½ before being required to take mandatory distributions (RMDs). This provides the inheriting spouse the potential for greater tax-deferred growth and the ability to choose who receives the assets in the account after he or she dies.
A non-spousal beneficiary has a number of options: to withdraw all the funds from the IRA, immediately (thereby paying taxes immediately), to wait to withdraw the funds until the end of the fifth year following the account owner’s death (allowing a short period of time to grow the assets while delaying payment of taxes on them), or, instead, can create a separate inherited IRA account, taking RMDs over their own life expectancy, gaining the opportunity for continued tax-deferred growth. (Some determining factors include the life expectancy of the surviving beneficiary and when the original owner died relative to his or her required RMD date.)
- QUALIFIED PLAN FUND INHERITANCES
Each 401(k) (employer-sponsored retirement plan) has its own set of rules. However, with most, whether Roth or traditional, when a person dies, the funds in his or her 401(k) could be subject to federal estate tax if, when added to all other assets owned by the estate, the total exceeds the new higher federal lifetime gift and estate tax exclusion limits. Designated beneficiaries, mainly spousal beneficiaries of qualified 401(k) plans, can opt to delay taking delivery of the inherited funds, thereby also delaying having to pay the related taxes, by rolling the inherited funds into an inherited IRA. This can create another avenue to tax-deferred growth and later, lower tax liability.
- EXEMPTION PORTABILITY
In order for a surviving spouse to add a deceased spouse’s unused individual estate tax exemption to their own, referred to as “portability”, the surviving spouse must elect it on the estate tax return of the deceased spouse, even if there is no tax due. To do so, the estate’s executor is required to file a tax return for the estate (Form 706) within nine months of the first spouse’s death, or risk future federal estate taxation.
While portability can be extremely beneficial, it should be just one tool in the estate planning toolbox. Portability does not apply to the Generation Skipping Transfer Tax (GST) exemption, and remarriage of the surviving spouse can impact its viability.
- REVIEW YOUR FORMULA TRUSTS
If your estate plan contains formula-based trusts that direct estate assets up to the federal estate tax exemption to maximize estate tax avoidance, be aware that the increased limits may result in all (or a great portion) of the estate’s assets being used to fund, for example, the family trust, leaving nothing remaining to fund the marital trust.
- SLAT TRUSTS
If you have employed a SLAT (spousal lifetime access trust) to safeguard your assets from future creditors and estate taxes, you can now fund it up to the new exemption limit. A SLAT is an irrevocable trust, created for the benefit of a spouse that allows the Trustee to make distributions from the trust to the spouse prior to the Grantor’s death, while still allowing the Grantor some control over the trust assets. Be aware, however, that SLAT assets can be lost to the spouse for whom the trust was created in the case of divorce.
- THIS TOO SHALL PASS, SO ACT NOW
As with all good things, the increased transfer tax exemption will only last until 2026, when they will be reduced to pre-reform (2017) levels of $5.6 million. And while 2026 seems a long way off, it is important to take advantage of the chance to shelter your estate from taxation and build flexibility into your estate plan for the future. After all, we could see changes before 2026 with a new President and Congress!
For more information regarding these tax changes or any other estate planning concern, please contact us at 404-255-7400 or info@hoffmanestatelaw.com.
