Estate and Gift Tax Update
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (“TCJA”). This new legislation makes the most sweeping changes to our tax laws since the Tax Reform Act of 1986. TCJA makes changes to many of our tax laws, including federal estate taxes. Below are some of the estate tax law changes:
1. Temporary Increase in Federal Estate Tax Exclusion Amount
For decedents dying in 2017, the federal estate tax exclusion amount was $5.45 million per person. Beginning for decedents dying on January 1, 2018 or later, the federal estate tax exclusion amount is increased to $11.2 million per person. A married couple may exclude up to $22.4 million, because of a rule known as “DSUE”.
John and Delores Johnson have a $22 million estate. They both have simple wills which leaves their entire estate to their spouse, or if there is no surviving spouse, then to their children.
Assume John dies first and his entire estate passes to Delores. No estate tax is owed at John’s death because all of his assets which pass to Delores qualify for the unlimited marital deduction. However, by leaving his estate to Delores, John did not utilize his $11.2 million exclusion amount.
When Delores dies, her estate is $22 million, but because of DSUE, her estate owes no federal estate tax. This is because she has her own $11.2 million exclusion amount, plus she can utilize John’s $11.2 exclusion amount because of John’s DSUE.
NOTE: The DSUE rule does not apply for Minnesota estate tax purposes, so more traditional two trust planning is required to take advantage of each spouse’s Minnesota estate tax exemption (see below).
The exclusion amount is linked to inflation, so the exclusion amount may increase in future years. The federal estate tax rate remains 40%, meaning the tax owed is essentially 40% of the amount by which the value of the taxable estate exceeds the federal exclusion amount. The increased exclusion amount will continue until the end of 2025, after which the increased exclusions will revert back to estate tax laws prior to 2018.
Bill’s Planning Point: The upshot of these new laws is that far fewer estates will be subject to federal estate tax. But if you plan to live beyond 2025, you may still need to be concerned about federal estate taxes and will want to plan accordingly.
2. "Step Up In Basis" Rule Remains in Tact
TCJA made no changes to the “Step Up in Basis” rule. This rule says that the cost basis of capital assets is reset to the value of the capital asset on the date of decedent’s death.
Helen bought 3M stock for $30 per share. Helen wants to avoid probate so she establishes a revocable trust and transfers the 3M stock to the trust. At her death, Helen’s trust still owns the 3M stock, which is then valued at $100 per share. Helen’s trust leaves the 3M stock to her daughter, Sandy. Sandy inherits the 3M stock and she will only incur a capital gain if she sells the 3M for more than $100 per share.
The Step Up in Basis rule does not apply to gifted assets. In the example above, if Helen gifted the stock to Sandy (rather than leaving it to Sandy at Helen’s death), Sandy’s basis would be $30 per share. In that event, Sandy would incur a capital gain if she sells the 3M stock for more than $30 per share.
The Step Up in Basis rule does not apply to income in respect of a decedent (“IRD”). IRD is essentially income earned by the taxpayer, but which has not yet been taxed. Common examples of IRD include traditional IRAs, 401ks and deferred annuities. There is no step up in basis on IRD when the owner dies.
Bill’s Planning Point: When planning whether to make a gift of stock or other capital assets, be mindful of your cost basis. Generally, it’s better to gift stock with a high basis, and bequeath stock with a low basis.
3. Annual Gift Tax Exclusion Increases To $15,000
For 2018, the annual gift tax exclusion is $15,000. This means a donor may gift up to $15,000 per year, per donee, without having to file a gift tax return. The donee does not have to report a gift as taxable income. A donor’s annual gifts to a donee in excess of $15,000 is referred to as a “taxable gift.” Taxable gifts must be reported by the donor on a federal gift tax return (Form 709) and reduce the donor’s lifetime gift and estate tax exclusion amount ($11.2 million for 2018). So although taxable gifts must be reported, very few donors will have to pay an actual gift tax.
Bill’s Planning Point: Don’t confuse the annual gift tax exclusion rule with the Medicaid 5 year “look back” rule. Applicants for Medicaid long term care benefits (in Minnesota, our Medicaid program is called “Medical Assistance”) must report all gifts made by the applicant (and the applicant’s spouse, if married) within 5 years of the date of the Medicaid application, even gifts which were less than $15,000 per year per recipient. Gifts made within 5 years of the Medicaid application may impact the applicant’s eligibility for benefits.
If you’re contemplating making a gift for tax or Medicaid purposes, it’s important that you understand the ramification of the gift before you make the transfer. As estate planning and elder law attorneys, we can help you make an informed decision.
4. Minnesota Estate Tax is Still Alive
Minnesota has its own estate tax. In 2017, the Minnesota estate tax exclusion was increased from $1.8 million to $2.1 million for decedent’s dying in 2017.
For decedent’s dying in 2018, the Minnesota estate tax exclusion is $2.4 million, and is scheduled to increase to $2.7 million in 2019, and then settle in at $3 million in 2020 and thereafter.
The Minnesota estate tax rates range from 13% to 16% depending upon the size of the estate.
The DSUE rule noted above for federal estate taxes does not apply to Minnesota estate taxes. Therefore, married couples will want to consider a “two trust” plan (that is where each spouse has a revocable trust) to double the amount they can pass without paying Minnesota estate tax.
Annual exclusion gifts and taxable gifts made more than three years before the decedent’s death may be strategies to reduce the Minnesota estate tax, but must be weighed against the loss of the “step up in basis” rule on the gifted assets (as noted above).
Bill’s Planning Point: The Minnesota estate tax exclusion used to be much lower (i.e., $1 million). Because of the discrepancy in the size of the federal and Minnesota estate tax exclusion amounts, as well as the increase in the Minnesota estate tax exclusion, it would be prudent for a married couple with a “two trust” plans to review their current plan to determine if amendments are recommended.
If you would like to have us review your plan to determine if it is in good order, please call our front desk at 763-398-5800 to schedule a consultation.
Pension Protection Act Paves the Way For New Ways to Finance Long-Term Care
Americans are living longer than ever before. Why? It's because:
We tend to take better care of ourselves
We have access to medical care that supports healthier lifestyles
More of us remain active into our retirement years
As you look ahead to the future, your plans frequently center on family. Today, many Americans worry they’ll one day become a financial or emotional burden to their family - the people they love most. If you experience a health event and require long-term care (LTC) – and you have not prepared for this need – your family members could very likely become caregivers.
LTC insurance is a way to get reimbursed for covered expenses you may incur from receiving care – either at home or in a facility – when you are unable to do some of the six activities of daily living (ADLs): bathing, dressing, eating, continence, toileting and transferring.
Asset-based LTC products differ from traditional LTC insurance. These products provide a way to preserve retirement savings while providing a way for clients to pay the costs of an LTC event, if needed. Asset-based long-term care products are typically either life insurance or annuity policies that may be used for LTC if needed. You may also have heard of these policies referred to as hybrids, combination, or linked-benefit policies.
With these policies, if long-term care is needed, your life insurance death benefit or annuity value may be accessed to pay for qualifying long-term care expenses on a tax-free basis. If you only use a portion of your life insurance death benefit or annuity value before you pass away, your named beneficiaries will receive the balance of death benefit or annuity value. Once your life insurance death benefit or annuity contract is paid out for long-term care expenses, you may continue to receive long-term care benefits by purchasing an extension or continuation rider. If long-term care is not needed, your named beneficiaries receive the life insurance or annuity payout. This is a win/win situation! Someone will receive the benefits – either you or your beneficiaries.
Another critical feature of these types of asset-based policies is that your premiums are guaranteed. There are no surprises.
Please call Janet Hansen at 763-398-5800 with any questions you may have in planning for your long-term care needs.