“Nothing’s certain but death and taxes” is no longer true in 2018 for many people, at least for estate taxes. Under the new Trump tax law, federal estate tax applies only to estates larger than about $11.2 million if you’re single or twice that amount, $22.4 million, if you’re married. These new “exclusion amounts” (the amount below which you don’t have to pay federal estate taxes) are twice the thresholds under prior law. This will exempt many more people from federal estate taxes.
Note, however that these new amounts apply to federal estate taxes. The new tax law does not impact state estate taxes. $5,250,000 is the threshold In New York in 2018 below which there is no estate tax for single or married people. In 2019 this amount goes up to $5,600,000 while the federal exclusion amounts will be $11.2 million (if you’re single) and $22.4 million (if you’re married) adjusted for inflation.
The large divergence between the state and federal exclusion amounts creates traps for some people with old wills, so check with your estate planning attorney. If gifts made during your lifetime have used up your federal lifetime exclusion amount, the doubling of the amount under the new tax law provides new opportunities for estate and gift planning. New planning may also enable you to lessen the state estate tax bite.
But nothing lasts forever. The new law will sunset in 2025; then the federal exclusion amount will fall back to $5,600,000 for single persons and $11.2 million for married couples. (Both amounts will adjust for inflation.) And, of course, a future Congress could change the law again. So, consider your options now.
Highlights of the New Tax Law which Impact Estate Planning
What’s new and what remains the same for estate, generation skipping transfer and gift tax under the new law. (The highlighted amounts are new.)
|Federal estate tax exclusion amount||NY State estate tax exclusion amount|
|2019||$11,200,000 (plus adj. for inflation)||$5,600,000|
|2026||$5,600,000 (plus adj. for inflation)||$5,600,000 (plus adj. for inflation)|
2018 Annual gift tax exclusion: $15,000 individual; $30,000 married couple filing jointly. 2018 Estate, Gift and Generation Skipping Transfer Tax, rate: 40%.
Planning for the New York Estate Tax
If you’re married and will have an estate that’s above the state estate tax exclusion amount you might consider using a "credit shelter trust" to reduce state estate taxes. Here’s an example that illustrates how it works.
Planning Without Credit Shelter Trust:
A married couple in New York has an estate worth $20 million ($10 million each). In 2018, the wife dies leaving everything to the husband. There is no state or federal estate tax on the wife’s estate because of the marital deduction. The husband dies later that year. There is no federal estate tax on the husband’s death because the estate is under the $22.4 million exclusion amount. However, there is a state estate tax on $20 million of about $2.7 million. The table below summarizes these results.
|Wife||Husband||Federal Estate Tax||State Estate Tax|
|On W’s death||$20,000,000||0||0|
|On H’s death||$20,000,000||0||$2,666,800|
Planning with Credit Shelter Trust:
Now suppose the wife’s will had created a credit shelter trust funded with the New York exclusion amount of $5,250,000 and had left the remainder to the husband. On the wife’s death, there would be no state or federal estate tax. This is because the trust (which does not qualify for the marital deduction) is below the taxable threshold for New York and federal estate tax and the remainder of the estate passes to the husband tax free due to the marital deduction.
When the husband dies, his estate is worth $14.75 (his $10 million + $4.75 million from the wife). There is still no federal estate tax because the estate is under the federal threshold. The NY estate tax on $14.75 million is roughly $728,000 using the credit shelter trust. The couple has lowered their NY estate tax by roughly $1,938,800 ($2,666,800 NY state estate tax without a credit shelter trust – $ 728,000 with a credit shelter trust = $1,938,800). The table below summarizes these results.
|Wife||Husband||Trust||Federal Estate Tax||State Estate Tax|
|On W's death||$ 4,750,000||$5,250,000||0||0|
|On H's death||$14,750,000||0||$728,000|
Peculiar to the New York estate tax calculation is the so called "cliff": you get the full benefit of the exclusion only if the estate is equal to or below the exclusion amount; if your estate is above the exclusion amount by more than 5%, then the whole estate is taxable.
These examples assume that both spouses are U.S. citizens.
Finally, with all of the commotion and news about the new tax law, don’t forget there are many non tax reasons for having a will (or revocable trust). You need a will to control who receives your assets and how those assets get distributed. Remember that wills and trusts enable you to plan for contingencies and special circumstances, for example:
- a special needs trust for a disabled child can protect the child from losing state or federal aid;
- trusts provide asset protection against business creditors, lawsuits, divorcing spouses and others;
- trusts can also protect children from a first marriage when there’s a second family;
- trusts may be used to distribute family wealth over time to a young beneficiary to avoid his or her receiving large amounts when too young to responsibly handle them.
A trust can be included under your will or be created while you are alive.
It’s important to revisit your estate planning documents after significant events such as divorce, a death, or a marriage of a child, to ensure they still carry out your intentions. A change in the tax law is also an event that warrants a review of your planning.