On December 22, 2017, President Trump signed a bill that makes huge changes to the American tax system—including the estate and gift tax. As of 2018, individuals can give away up to $11.2 million free of estate and gift tax, and couples can combine that to give away up to $22.4 million! These exemptions are indexed to inflation and scheduled to revert back to 2017 levels in 2026 (unless Congress extends them or makes them permanent at that point).
This sounds like big news, but, to tell the truth, there’s no benefit to most of us. Less than 1% of Americans were subject to the estate tax under the old law–now even fewer of them are. The Joint Committee on Taxation now estimates that there will be only 1800 taxable estates (in the ENTIRE COUNTRY) in 2018, compared to 5,000 under the previous law, and 52,000 in 2000, when the exemption was $675,000.
So, what does that mean for most of us? It means that estate planning isn’t really about minimizing the estate or gift tax any longer. (And it hasn’t been since 2012 for those with $5 million or less.) But that doesn’t mean you don’t need an estate plan.
First, if your plan is more than five years old, you should have it reviewed to make sure it still meets your needs. Many people have old plans that were designed to minimize the estate tax in a way that isn’t relevant any longer for people with less than $11 million (again, most of us) and will cause increased income taxes for their kids when they inherit.
And second, as long as you are mortal, you still need an estate plan to do the following things:
- Managing Money for Minor Children. Children under the age of 18 can’t own property worth more than $5,000. So, if you are going to leave them an inheritance, you need to make sure that there’s an adult in charge until they are at least 18—usually longer than that. Simple custodial accounts, or a will or a living trust that names an adult to manage money until a child is at least 25 years old, makes sense.
- Taking Care of a Surviving Partner or Spouse. If you are in a relationship with someone, putting an estate plan in place to guarantee their comfort and security is key. To do this, families often use wills or trusts, as well as life insurance and retirement assets, to help surviving spouses and partners remain in their homes and take care of their needs.
- Planning in a blended family. Many Californians live in non-traditional families, where partners bring children from previous relationships. Balancing a partner’s needs with those of children that may differ dramatically in age makes estate planning tricky sometimes.
- Smart ways to give to Charities. If you want to give to charity, using pre-tax dollars can go a long way towards making your gifts efficient.
- Making sure your beneficiary forms are up to date. It is a fact of life that many Californians will work at several jobs during their working lives. Making sure that your old 401k’s are rolled over into IRA’s when you leave a job and that your beneficiary designations are up to date will make it easier for your loved ones when you die.
- Avoiding probate. Many states have made their probate process relatively inexpensive and quick. But not California. Creating a living trust will save your loved ones both money and time by keeping the probate court out of the estate settlement process.
So, please don’t confuse a tax break for the wealthy with a time-out for everyone else. A good estate plan still makes perfect sense. And, if you have an estate plan that was drafted more than 5 years ago, now is the perfect time to have it reviewed to see if it still meets your goals, tax-related and otherwise.