How long has it been since your revocable living trust was drafted or at least reviewed? If you do not have this important estate planning document it is time to make it a priority. There have been substantial estate and gift tax changes over the last 10 years, starting in 2011 with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (made “permanent” in 2012 with the American Taxpayer Relief Act of 2012) and most recently, starting in 2018, with the Tax Cuts and Jobs Act of 2017. These laws have turned the estate, gift, and trust landscape upside-down. The changes have included income tax rates, estate and gift tax rates, the annual gift tax exclusion, portability, the unified estate and gift tax exemption, as well as the generation skipping transfer tax exemption. If your revocable living trust does not factor these changes into your estate plan, you may no longer have the best or intended result.
However, it is not too late to have your revocable living trust reviewed and potentially amended to take into account the current estate and gift tax environment. Your revocable living trust could also be amended to address future changes. The goal is to have an estate plan that is easier on the surviving spouse (or whoever the Trustee is) and one that makes the best use of assets.
Example: Let us take a look at a California couple who are U.S. citizens on their first marriage and that had $5 million in assets in 2005. They were probably advised to create a revocable living trust that splits into three separate trusts upon the first spouse to die; a Survivor Trust, a Marital Trust, and an Exemption Trust. In 2018 and 2019, this couple could have grown their assets to $10 million, which would have created unneeded complexity, tax preparation costs, and potentially income taxes for the following reasons:
- The unified estate and gift tax exemption, as well as the Generation Skipping Transfer Tax exemption, are set at $11,180,000 in 2018 for a single U.S. citizen ($22,360,000 for a married couple who are U.S. citizens). For 2019, inflation is increasing those slightly to $11,400,000 and $22,800,000, respectively. This means that you can essentially gift during your lifetime, or bequeath at your death up to these amounts and not incur any estate or gift tax.
- Assets in an Exemption Trust are not included in the surviving spouse’s estate, but that also means that they would not get a basis adjustment to the fair market value when the surviving spouse dies, which could reduce income taxes when sold.
If you are near the lifetime exemption amounts, you can take advantage of the annual gift tax exclusion to reduce your estate. An individual can gift up to $15,000 (a married couple can gift up to $30,000) in 2018 and 2019 to any individual. Those gifts will be covered by the annual gift tax exclusion and not reduce your lifetime unified estate and gift tax exclusion. The larger your estate, the more estate planning tools are available to reduce or even eliminate an estate tax.
Everything discussed above is only valid until politicians change the rules, or 2026, when the unified lifetime estate and gift tax exemption will go back to $5 million. As such, it is prudent to consider using the annual gift tax exclusion and any remaining unified estate and gift tax exemption while they are at an all-time high.