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Congress enacted sweeping tax reform, which President Trump signed into law on December 22, 2017. It is called the Tax Cuts and Jobs Act. How does this change impact my living trust?

  • The Tax Cuts and Jobs Act doubles each person’s estate tax exemption from $5,000,000 to $10,000,000. Because the estate tax exemption is adjusted for inflation from 2011, the actual amount is a bit higher.
  • In 2018, a single person can pass on $11,180,000 free of estate tax, and a married couple can pass on $22,360,000 free of estate tax.
  • January 1, 2026, the estate tax exemption will roll back/sunset to $5,000,000 per person (adjusted for inflation after 2011) unless Congress intervenes.

Will I need to change my living trust because of tax reform?

  • For most people, the answer is probably not. For example, a married couple with a total net worth of less than $11,180,000 would not have had to pay estate tax under the old law and will not have to pay estate tax under the Tax Cuts and Jobs Act. The same would be true for a single person with a net worth of less than $5,590,000.
  • Things get more complicated for a couple with a net worth of more than $11,180,000 or a single person with a net worth of more than $5,590,000. Those taxpayers may want to consider some estate tax planning in case the new exemptions “sunset” on December 31, 2025 as scheduled.

Make sure to review your estate plan every few years to make sure that it is up to date.

  • The most common reason for updating your estate plan is for changes in your own personal circumstances. For example, a marriage, divorce, or a birth of a child or grandchild may cause you to want to rethink your estate plan.

A married couple may also want to check to see if their trust is structured as a so-called “A-B Trust” or “A-B-C Trust.”  Many trusts drafted before 2012 used this structure to ensure that the couple could use both spouses’ estate tax exemptions.  These trusts generally required that if one spouse died, his or her share of the couple’s assets much be put into an Irrevocable Trust—often called a Bypass Trust.  The surviving spouse would be entitled to all of the income of the Bypass Trust, but generally would only be able to access the trust assets themselves to meet his or her needs as defined in the Bypass Trust.

  • Because the Bypass Trust is a separate taxpayer, the surviving spouse will have to make sure that a separate tax return was filed for the Bypass Trust every year.
  • If the assets of the Bypass Trust increase in value during the surviving spouse’s lifetime, the family may have to pay capital gains tax that could otherwise be avoided. This is because the assets of a Bypass Trust are not eligible for what is known as a step-up in basis when the surviving spouse passes away.
  • Since 2012, a married couple no longer has to use the “A-B Trust” structure to ensure that both spouses’ estate tax exemptions are used. Under current law, which was not changed by the Tax Cuts and Jobs Act, the surviving spouse is free to inherit the entire estate and use it however he or she wishes—without any reduction in the amount the couple could pass to their heirs free of estate tax.
  • There are situations where a Bypass Trust may be appropriate—such as a second marriage involving a blended family.
  • Finally, since it is no longer required for estate tax purposes, it is worth discussing with your attorney whether the added flexibility and autonomy is a good fit for your estate planning needs.

This is a general overview of how the Tax Cuts and Jobs Act may impact estate planning. This is not legal advice. If you would like to speak with Jonathan about your estate tax, business or tax matter, please feel free to email him at jcw@eastbaybusinesslawyer.com

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