As you may be aware, the law has changed dramatically for estate and gift taxes in recent years. In 2011, the estate tax exemption increased to $5 million and there have been subsequent increases under the Tax Cuts and Jobs Act (TCJA). For 2019, the exemption amount is $11,400,000. However, this is not permanent; it is subject to sunset provisions at the end of 2025. The implications of the large increases are complex and affect estate planning for everyone, not just the few that will be required to file and pay estate tax.

With these increases and other changes, the focus of estate planning has shifted from minimizing estate tax, which applies to fewer individuals, to an emphasis on income tax planning and asset preservation for the rest of us. The transfer of property and the basis in that property will affect the amount of income tax paid by subsequent owners. If property is gifted, the donee’s basis in property is the same as the person who gifted the property. However, the law defines income tax basis of property received from a decedent by bequest or inheritance as the property’s fair market value on the date of death, commonly referred to as a “step-up” basis. Therefore, if estate tax isn’t an issue, then transferring property to beneficiaries with the higher basis step-up, could significantly reduce income taxes down the road.

As a result of these changes, this is good time to revisit strategies that were used when establishing your estate plan and to consider revoking or amending estate documents that may no longer achieve the desired effect as a result of recent tax law changes. Adequate planning will help avoid landmines that could possibly exist in outdated documents and avoid unexpected results such as the following:


  1. Gifting using the annual exclusion amount (which is $15,000 for 2019) – One of the benefits of using the gift tax annual exclusion to make transfers during life is to save estate tax. Both the transferred asset and also post-transfer appreciation generated by the asset are removed from the donor’s estate. However, if estate tax is no longer an issue, making an annual exclusion transfer of appreciated property carries a potential income tax cost because the done receives the donor’s basis upon transfer. If the property is held until the donor’s death, the heir will get a step-up in basis which will eliminate the capital gain tax on any pre-death appreciation in the value of the property.
  2. Revocable living A/B trusts – the planning technique using a marital trust and a credit shelter trust was an excellent technique for many individuals when the estate tax exemption was much lower and it may still be under the right circumstances. However, this may no longer be the best strategy for your estate plan. Under this technique, assets of the first spouse to die go into two trusts; a marital trust and a credit shelter trust. The B trust (family trust/credit shelter) is funded with assets that have value equal to the remaining estate tax exemption of the first spouse to die. The remaining assets go to the A trust (marital trust). An A/B trust accomplishes the goal of reducing estate tax to zero on the first spouse and avoids estate tax on the appreciation of assets for the remainder of the surviving spouse’s life. The assets going to the B trust get a step up in basis at the time the first spouse dies; however the value is then frozen. There is no additional step up for these assets when the second spouse dies – not a desired outcome. The assets in the A trust are included in the surviving spouse’s estate and do get another step up. If you have this type of trust set up, consider these pitfalls:
    1. When the exemption amount was much lower, this may have been excellent planning. However, with the higher exemption, this may longer be necessary, especially if there is no estate tax savings. The heirs receiving the assets held in the B trust (family trust) will have to pay additional income tax at the time those assets are sold due to a lower (frozen) basis.
    2. In addition, if the value of the estate is under the exemption amount, all assets may go to the family trust and none to the marital trust. Depending on the distribution provisions of the credit shelter trust, none of the assets may be available to the surviving spouse who could be effectively disinherited.
  3.  Estate exclusion and valuation discounts – Some strategies to avoid inclusion of property in the estate may no longer be worth pursuing. It may be better to have the property included in the estate or to not qualify for valuation discounts so that the property has a higher basis.

Estate planning has always involved more than just strategizing how to minimize estate tax and income tax. Planning may be needed to address several nontax issues that apply to most taxpayers, even those with small estates. This may include structuring asset ownership to avoid probate and also reviewing beneficiary designations on life insurance policies and retirement accounts. It may include addressing special needs, family members that are not financially responsible, charitable goals and may other items. You may want to consider establishing a plan or update your existing plan for these issues as well. .

If you would like to discuss your estate plan, strategies or other issues, please contact us. If you have a trust document you would like us to look over, send us a copy and our Trust Manager will read and provide you feedback or recommendations.

Westbrook CPA