In 2017, the IRS announced that the estate and gift tax exemption for individuals would be a total of $11.18 million. Then, the following year, the IRS announced another change to the estate tax, bringing that exemption up to $11.4 million.
This means that any and all estate plans previously built on the basis of older tax laws must take into account that, with the new changes, an estate can be considerably larger and still get away without paying a dime on federal tax law – in some states, at least.
For example, states like California have no estate tax or inheritance tax laws. This means that no estate with a total value under $11.4 million ($22.8 million for married couples sharing their estate tax exemption) is eligible for taxation.
However, it’s important to consider that, should an individual have ever gifted beyond the annual limit, they have the option of cutting into their tax exemption as a way to avoiding tax on their gifts. This must be taken into consideration when totaling an estate to determine whether an estate is approaching the local or federal tax exemption limit.
For most Americans, an exemption of $11.4 million is astronomical. But that doesn’t mean there’s no good reason to consider maintaining an estate plan, or regularly amending it.
Estate plans can do many things, from assigning guardianship, to protecting certain assets from creditors, setting up fund for disabled or fiscally irresponsible children, or maintaining a fund for your pet should anything happen to you.
Nevertheless, life is volatile. Things happen, and sometimes, it’s prudent to amend an estate plan – particularly after a life-changing event, such as a divorce, a marriage, a death, a birth, a financial catastrophe, or an incredible windfall.
How Often Should You Update Your Estate Plan?
An estate plan should be updated whenever a relevant life-changing event calls for an amendment to any and all estate plans, from amending who gets what, to changing beneficiaries, and going over your current estate plan in lieu with changes made to the federal or state estate tax laws.
Alternatively, a good rule of thumb is to go over your estate plan every three to five years.
Another thing to consider is appreciation. Assets can appreciate or depreciate over time, and some assets appreciate considerably. Think the skyrocketing value of a rising company’s stock, the value of a property, or any other asset you possess.
If you’re expecting a serious increase in value, transferring these new assets to an irrevocable living trust can shelter you from the gift and estate taxes associated with transferring them to your loved ones once the value has appreciated.
Estate Planning Tools to Consider
You don’t have to be a millionaire to plan your estate like one. Even modest estates stand to benefit from some estate planning tools, either as a way to shelter certain assets from potential creditors, minimize the tax cost of gifting an asset, or ensuring that someone you trust is in control of making certain decisions regarding your medical care and financial legacy should you become permanently incapacitated, or pass away.
Estate plans exist to offer people a maximum level of control over their estate before they pass away. Some people require more complex estate plans than others. If you’re sure your estate plan will remain uncontested, and you’re a married person with few children and a modest estate, then a very simple plan will do.
But for more complex families with a series of volatile or strange assets, or other considerations (family feuds, sibling rivalries), more complex estate planning tools may come into play.
Revocable Living Trusts
Revocable living trusts are trusts that are amendable. These can become critical as a way to have more control over the assets in your estate and ensure that they do not pass through the probate process. Because these trusts are set up by you (the grantor) while you are alive, they are ‘living’ trusts.
Nonetheless, they only go into effect should certain circumstances call for the trust to go into effect, as per how the trust is drafted (typically, living trusts are executed and resolved after the grantor passes away and the successor trustee takes control of the trust).
Irrevocable Living Trusts
Irrevocable living trusts completely separate the asset from the grantor and cannot typically be changed or undone. Once an asset is in an irrevocable living trust, it is funded into the trust and not under control of the grantor.
As such, irrevocable living trusts may be used to reduce the size of an estate, avoid the gift tax, or protect an asset from potential creditors. While limited in the amount of control given to the grantor, irrevocable trusts can be crucial in many complex estate plans.
A living will is a document meant to act as a medical surrogate in the event that you are incapacitated. It outlines what doctors may and may not do, as per your specifications. This is not to be confused with a living trust, or a last will and testament.
The Bottom Line
The right estate plan can go a long way, even for families with estates well under a total value of $11.4 million. However, estate tax laws are subject to change, and even if no deliberate change is made by any party in the federal government, estate tax exemption limits are a matter that must be regularly amended, sometimes adjusting the exemption limit drastically.
As recently as 2009, the estate tax exemption limit was $3.5 million, with a maximum rate of 45 percent. Tax reform on the state level can also greatly affect estate planning decisions, as California senator Scott Wiener recently proposed to lower the exemption in California back to the 2009 rates.
While this proposal hasn’t become law, other similar proposals might one day. It’s wise to keep an eye on both federal and state-level tax reform when amending your estate plan.