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Avoiding the Estate Tax Trap in the New Tax Law Environment
Published Date : January 25, 2018
The new tax law has brought about significant financial changes and opportunities for individuals and families, not least of which is the substantial increase in the estate and gift tax Lifetime Exemption amount. This amount has essentially doubled overnight, to a newly available $11.2 million per person in 2018 ($22.4 million for married couples). As a result of this generous new provision, many people will currently not be affected by this area of taxation, and thus, they might simply feel inclined to now avoid estate planning altogether, feeling (quite rightly in the moment) that this whole matter does not apply to them. But there are still a few good reasons to stay engaged and proactively planning on the estate front, including the temporary nature of these new Lifetime Exemption amounts which currently remain available only through the year 2025, as well as something called “portability”. While this all seems like straightforward good news for many high-net-worth families, without ongoing proactive planning, it could also potentially increase the likelihood of a surviving spouse leaving the estate vulnerable to the “estate tax trap” upon their own death — and the estate tax itself remains, at the rate of 40%.
The estate tax trap is a term used to describe the inadvertent triggering of the estate tax at the second spouse’s death due to assets being taxable that could have previously been excluded at the time of the first spouse’s death. With this new law raising the Lifetime Exemption to $11.2 million per person, some surviving spouses may simply find it unnecessary to file a Form 706 (estate tax return) at the time of their spouse’s death. Besides, filing a 706 is typically expensive and time-consuming, and even somewhat invasive at a time when emotions are raw, so filing it might seem excessive and unnecessary. There are, though, two compelling factors to carefully consider before deciding whether to file a 706 or not. First, there is a distinct possibility that the estate tax exemption amount will change over time, not only because it is already set to expire in 2025, but also because a future Congress might simply change the provisions. Secondly, there is an inherently valuable feature in current estate tax law called the portability election. This concept enables a surviving spouse to take over any unused portion of their deceased spouses Lifetime Exemption. That is, it makes it portable among spouses as long as it is elected when filing an estate tax return, or Form 706; it is not automatic.
Again, this may not seem like an issue now; however, estates can add up quickly, and there will hopefully be future price appreciation on assets, too. For example, take someone with a primary residence at $4 – $5 million or so and a second home at $1 – $2 million, a portfolio of $3 – $5 million and some IRA’s adding up to another half million or more. Suddenly, the new Lifetime amount is just barely sufficient to cover it all and, without proper planning and/or portability, there would be far less wiggle room. Hence, despite the welcome new estate-related provisions of the recent tax law, it still makes sense for many people to actively engage in sensible ongoing estate planning to help avoid any unnecessary tax traps, and their unpleasant associated costs.
Source: www.irs.gov
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
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