After a Congressional roller coaster at the end of 2017 where the end of the federal estate tax (at least temporary end) seemed possible, the new tax laws that took effect on January 1, 2018, made relatively few substantive changes to the federal estate tax laws.
The headline capturing significant change was the increase in the per person estate and gift tax exemption from $5.6 million to $11,180,000. For individuals with estates over that $11,180,000 mark, this will result in a savings to their estate of approximately $2.24 million (noting the savings is a bit less for Minnesota residents who also have to pay a Minnesota estate tax or those subject to estate taxes in other states).
Impact of New Law
BUT WAIT… that isn’t the end of the story… the new laws are not permanent (as explained below) AND if you are a Minnesota resident you must not forget that you are subject to Minnesota estate tax at rates of 13 to 16% over the Minnesota exemption amount. So what do these changes mean for you? It means that if you are a Minnesota resident and your assets are more than $2.4 million, you may still be subject to payment of estate taxes. By way of example, if your assets are $3 million, you are $600,000 over the 2018 Minnesota exemption; your estate would have a tax bill for Minnesota estate taxes of $78,000.
Therefore, for federal estate tax purposes if your estate is larger than $5.6 million (or if your estate is likely to grow to exceed $5.6 million before 2026 – for example through receipt an inheritance) we encourage you to reach out to us, or another qualified estate planning attorney, to review ways that you could take advantage of these changes in the federal estate tax exemption. Because the current law is scheduled to automatically sunset at the end of 2025, you may wish to take steps to capture the additional exemption amount before it potentially expires.
Whether you are impacted by the new federal estate tax laws or not, now is a great time to review your estate plan to ensure that your wishes and goals a achieved and that your tax exposure is minimized:
- Are the beneficiaries you have named still the people and/or charities you still wish to receive portions of your estate?
- Are the individuals you have named to handle your finances and health care decisions still the people you would want to make these decisions for you?
- If you have large retirement accounts, and those retirement accounts will pass to a trust (especially a trust for a small child), and your plan has not been updated in the past 3 years, we encourage you to contact us, as there may be provisions that should be added to your estate plan.
- If your current primary estate planning document is a Will, do you want to contemplate converting to a Revocable Trust with the intent to avoid probate and plan for possible incapacity?
- If you already have a Revocable Trust, are all of your assets properly titled in the name of your Revocable Trust and/or have a proper beneficiary designation so that your estate will avoid probate?
- The annual gift tax exclusion (the amount that you can gift to each person before impacting your federal estate and gift tax exemption) increased from $14,000 to $15,000. If you make regular ‘annual exclusion gifts’ or have a life insurance policy owned by an irrevocable life insurance trust (also known as an “ILIT”), you should review whether or not this increase affects you.
This is complicated stuff. If you have questions about your estate plan, possible impacts of this new law, or would like to review possible updates, please contact the Felhaber Estate Planning and Administration Group.