Estate tax laws continually change, making it important to review your estate plan periodically. Working alongside a Carlson Capital Management tax professional will help you understand how the new laws will impact your estate and its beneficiaries, as well as your financial position today.

Federal Level: Higher Exemptions and Portability
Consider the new, higher lifetime estate exemptions: Only individuals with taxable estates greater than $11,400,000 and estates of married couples greater than $22,800,000 will have exposure to federal estate tax. After the year 2025, the higher exemptions are scheduled to revert back to the pre-Tax Cuts and Jobs Act of 2017 levels of approximately half the current exemption amounts. This makes now an ideal time to review your estate plan to make sure you are taking full advantage of the higher exemptions.

In addition to the higher lifetime estate exemptions, the federal law also includes a portability provision that allows a surviving spouse to benefit from the unused portion of their spouse’s exemption. Use of this provision is important to make sure you get the full benefit from both of your individual lifetime exemptions.

State Level: Varied Laws
Although most states no longer assess an estate tax, depending on your state of residency, state estate tax may still need to be addressed through planning. The state of Minnesota, for example, has a $3,000,000 exemption beginning in the year 2020, but doesn’t allow for portability of exemptions.

Increased Focus on Income Tax
There has always been a tension between reducing estate tax and reducing income tax. For many people, estate planning techniques used several years ago no longer make sense. We can no longer assume that removing an asset from the estate tax base will result in an overall tax savings. Because of higher exemptions and the potential for capital gain tax, many individuals have changed their estate tax planning strategies to focus on income tax.

Trust Provisions to Save Income Tax
For individuals who believe they may not be subject to estate tax at death, even when the federal exemptions revert back to the lower level, a credit shelter or bypass trust can be developed to allow for the surviving spouse to disclaim assets to a trust. This provides flexibility to ensure the best estate and income tax result. Another simple change may be to give the trustee spouse a general power of appointment, which will cause the trust assets to be included in the beneficiary spouse’s gross estate. This ensures the assets will obtain a basis step up upon the death of the second spouse and provide income tax savings upon disposition of the assets.

For trusts that have already been created, but as a result of changes in the law will provide no estate tax savings, there may be some simple solutions to reduce future capital gain taxes. For example, the trustee may be able to distribute some trust assets to beneficiaries now. In addition, some states allow the “decanting” of trusts. This allows for the transfer of trust assets
to another trust for the benefit of one or more of the same beneficiaries. The new trust would grant the beneficiary of the trust a power of appointment over the trust assets, causing inclusion in the surviving spouse’s estate and obtaining a basis step up. Note, however, that because decanting statutes vary widely from state to state, the effectiveness of this strategy will depend almost entirely on the terms of the trust and applicable state law.

Carlson Capital Management reviews clients’ estate plans and advises on the estate and income tax consequences of the plans. If you have any questions regarding your estate plan, please reach out to us to schedule a meeting or a call.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.