With estate tax planning, flexibility is critical. The estate tax exemption is scheduled to sunset next year. Although the results of the 2024 presidential and congressional election indicate the existing estate tax exemption will likely be renewed. This should lessen the risk you or your client’s assets will be subject to the estate tax at least in the near future. But, it’s uncertain how long any new estate tax laws will stay in place due to future elections.
These are some planning considerations to keep your or your client’s estate tax planning flexible:
- Update the structure of your trusts. It’s likely the estate tax exemption will remain high for the near future. However, if the presidency and Congress changes, it might be modified and in a significant way. Based on recent Democratic proposals, the exemption could be reduced to $3 million per spouse or $6 million for a married couple. In this tax environment, it can be beneficial for each spouse to have a separate trust. But, they need to be flexible. Trusts can be drafted to allow a surviving spouse to decide if the deceased spouse’s separate trust should be continued after the first spouse passes or whether it should be combined into the surviving spouse’s trust. In other words, the need and benefit of maintaining two trusts can be continually re-evaluated. This structure provides flexibility so the trusts can be kept in place if the estate tax exemption is significantly reduced or combined into one trust if the estate tax exemption remains very high.
- Incorporate income tax planning into your estate tax plan. Estate tax planning has traditionally been designed to solely protect against the estate tax. The downside of this traditional approach is that the assets in the deceased spouse’s trust don’t get a second step-up in basis. This means that when those assets are sold and distributed to the family or other beneficiaries, there would be a gain equal to any post-death appreciation. Unfortunately, this doesn’t minimize income taxes to your family or other beneficiaries. However, there is a way to draft separate trusts to avoid this. They can be structured to potentially obtain a second step-up on basis when the surviving spouse passes. This would eliminate or wipe out the capital gains tax on the post-death appreciation and be a significant benefit to your family or other beneficiaries.
- Create a simple and flexible estate tax plan. Separate trusts are important for estate tax planning. But, if the estate tax exemption remains very high and your assets are well below it, separate trust planning may no longer be beneficial. Instead, combining those separate trusts into one joint trust could simplify your estate plan. If your spouse passes first, that same trust will continue for you. In other words, it won’t be necessary to re-title assets and file an additional tax return for the deceased spouse’s trust. Also, the current estate tax laws permit a deceased spouse’s unused exemption to be carried over for the benefit of the surviving spouse. If your spouse passes first, this tax election could be made so estate taxes would be avoided or minimized at your passing.
If you have any questions about your estate tax planning, feel free to contact me at phmulder@cunninghamdalman.com.
