March 27, 2018

On January 1, 2018, tax legislation was signed, ushering in several changes to the wealth transfer tax system. As a result, we recommend to all of our clients that they review the terms of their Last Will & Testament and/or Revocable Trust at this time to ensure that your estate planning documents remain in accordance with your wishes, as now affected by the 2018 changes in the tax legislation. For instance, many Wills and Revocable Trusts are funded according to “formula clauses” tied to the exemption amount in effect on the date of your death. In the event that you die before the year 2026, these trusts may be funded with significantly larger amounts than anybody was anticipating when your documents were signed.

Estate Tax

The new law increases the federal estate, gift and generation-skipping transfer tax exemption amounts. The amounts increased to approximately $11,200,000.00 for individuals and $22,400,000.00 for married couples. These exemption amounts are scheduled to increase with inflation every year until 2025. On January 1, 2026, the exemption amounts are scheduled to “revert” back to the 2017 levels (adjusted for inflation). The exemption amount is the maximum amount of assets an individual can pass at death free of federal estate tax. Just because you may not have an estate of the magnitude of the above exemption amount, does not mean you do not need to review your existing estate plan documents.

What is important for you to consider, is whether your current estate plan needs to be updated and changed, especially if your Will or Revocable Trust creates a trust that is funded according to a “formula clause” tied to the exemption amount in effect on your date of death. We are concerned that if you die before January 1, 2026, your trust may be funded with significantly larger amounts than you were anticipating when those documents were signed - and the surviving spouse may be left with no funds in the surviving spouse’s trust.

The new law also extended “portability” between spouses. Portability allows the estate of a decedent who is survived by a spouse to make an election permitting the surviving spouse to get the benefit of the decedent’s unused exemption amount. However, the portability exemption must be claimed by the surviving spouse filing a federal estate tax return within nine (9) months of the first spouse’s death.

Gift Tax

For gifts made after December 31, 2017, the maximum gift tax rate will remain at forty (40%) percent, and the lifetime gift tax exemption will raise to $11,200,000.00 for individuals and $22,400,000.00 for married couples. The annual gift tax exemption for 2018 is $15,000.00 to each person per year, without having to file a gift tax return. Thus, in addition to the increased exemption amounts discussed above, the amount each person may give annually to as many individuals as he or she desires - without incurring a gift tax and without using any of the gift tax exemption amount, increases from $14,000.00 in 2017 to $15,000.00 in 2018. For an example, a married couple may make annual exclusion gifts of up to a total of $30,000.00 to an unlimited number of recipients.

What This May Mean for Your Estate Plan

The increased exemption amount under the new tax law could cause assets to be distributed in ways not contemplated when your original estate plan was executed. This is generally a result of a “funding formula” used to fund a credit shelter trust (also known as a “Family Trust” or “Trust B”) established in a Will or Revocable Trust when the exemption amount was $1,000,000.00 or less. For example, a Will may have funded a credit shelter trust with $1,000,000.00 in 2003, with the remainder passing to the surviving spouse. That same Will, in 2018, would fund the credit shelter trust with assets up to $11,200,000.00, greatly reducing or more likely eliminating the amount passing to the surviving spouse. This most likely is not the desired result, any longer.

The terms of your previously drafted Wills and/or Revocable Trust may contain provisions that fund according to formula clauses tied to the exemption amount in effect on your date of death. These trusts may be funded with significantly larger amounts than anyone was anticipating, when the documents were signed. Thus, we recommend you review the terms of your Will and/or Revocable Trust at this time to ensure that with the recent changes to the wealth transfer tax system, your estate planning documents remain in accordance with your wishes.

In conclusion, we are recommending that all of our clients revisit their estate plans since the increased exemption amounts may result in unintended consequences. Clair Law Offices recommends reviewing your estate plan at least every five (5) years in the event that changes in your circumstances might warrant a change in your estate plan as well. Death, marriage, divorce, remarriage, birth or adoption, or changes in the law are some of the changes that could require a change in your estate plan. Significant changes in your assets or your health are other good reasons to re-examine your documents.

Please contact us if you would like us to review your current estate plan in light of the new tax legislation that significantly changed and increased the exemption amounts. These significant increases in the exemption amounts present a very unique opportunity for estate planning. If you have any questions, or we can be of any assistance in your estate planning or other legal needs, please do not hesitate to contact our office to make an appointment for an office conference to review and discuss your existing estate plan documents.