Overlooked Consequences of New Estate Tax Law

A dramatic change to our nation’s estate and gift tax laws occurred in 2018. This change increased estate and gift tax exemptions to such an extent that most decedents’ estates may never incur estate taxes. However, these increased exemptions also harbor adverse consequences for many taxpayers who have estate plans designed around traditional A/B (taxable/non-taxable) trusts.

In 1996 the estate tax credit was only $600,000; in 2002 it was increased to $1 million; and in 2010 it jumped to $5,000,000. Now, in 2018, the exemption has been increased to over $11,000,000 for individuals and over $22,000,000 for couples. Before this major exemption increase, many families opted to put their post-death assets into A/B trusts structured to shield their assets from federal estate taxes. Unfortunately, these same increased exemptions can now render these estate plans obsolete. Unless updated, many A/B trust estate plans will force the creation of unnecessary post-death trusts and administration costs. Even worse, they can cause a sizable portion of a decedent’s assets to be allocated to a bypass trust that disinherits a surviving spouse. Yet another negative consequence would be the inability of those assets allocated to the bypass trust to receive a stepped-up basis for future capital gains tax purposes. Because of the many ramifications of this latest estate tax law change, married couples, especially those in second marriages and with blended families, would be wise to undertake a comprehensive review of their estate plan documents. (Note: Unless additional action is taken by Congress, at the end of 2025 these increased exemptions will revert to their 2017 levels.)