Is it Time to Rethink your Estate Plan?

Under the Tax Cuts and Jobs Act, the exclusion amount for taxable estates has doubled to $10 million indexed for inflation for 2018 through 2025.  With this high exclusion amount, it is anticipated that few estates will be subject to the Federal estate tax. Perhaps it’s time to shift your thinking from the traditional approach of reducing the amount of a taxable estate to building basis.

Estate Planning Word Circles Concept with great terms such as heir, laws, assets and more.

A few things to consider:

  • Minimize lifetime gifts
    • When assets are transferred to heirs during lifetime, the heirs take the basis that the donor held in the asset. If the asset is held until death, heirs will receive a stepped-up basis, presumably higher than the donor’s basis, in the asset.  If a donor does want to make lifetime gifts, consider making gifts of high-basis assets.
  • Retain power over transferred assets
    • If property transferred during lifetime is included in a taxable estate, the property is subject to a basis step-up. Transferring property while retaining the right to receive income from the property would pull it into a taxable estate and allow for a step-up in basis.
  • Transfer property to older relatives
    • Consider transferring assets to older relatives with shorter life expectancies. The older relative could provide in their will that the gifted asset be left to the donor allowing for a step-up in basis on the asset when it is distributed to the donor under the terms of the will.
  • Select the assets you wish to hold at death
    • Consider the income tax impact on certain assets when deciding what assets you wish to retain for a potential step-up in basis. For example, collectibles are taxed at a maximum capital gains rate of 28% vs. the usual 20%.  A step-up in basis would reduce the income tax consequences of the subsequent sale of collectibles.

Bear in mind that the estate tax exemption will vary from state-to-state and some of these techniques may not be appropriate or as advantageous depending on where you reside.  For example, the New York State estate tax exemption amount for 2018 is $5,250,000 – nearly half that of the Federal amount.

Be sure to consult with a professional advisor or estate planner before making any changes to your current estate plan.  Find out more about DKB’s Gift, Trust and Estate Planning Services here.