Top 10 Estate Planning Tax Facts for 2019
From: www.thinkadvisor.com
Although every client should review his or her estate planning strategy on a fairly regular basis, after a major tax overhaul, it’s important for clients to take an even more detailed look at the various elements of their estate plans.For some clients, this will require evaluating changing circumstances and future goals to determine whether existing trusts and other planning strategies continue to make sense in light of tax reform. Here are the top issues that clients may need to consider in 2019.
1. Enlarged Estate Tax Exemption
The 2017 tax reform legislation roughly doubled the transfer tax exemption to $11.4 million per individual, or $22.8 million per married couple, as adjusted for inflation in 2019 (the 2018 exemption was $11.18 million per person). Because the transfer tax exemption exempts both transfers at death and transfers made during life from estate, gift and GST taxes, the expansion has created an opportunity for wealthy clients to shield an even greater portion of their wealth from eventual taxation.
2. IRS Confirms: No Clawback for Post-Reform Transfer Tax Exemption
For transfer tax purposes, the IRS has released guidance confirming that clients will be allowed to make large gifts from 2018-2025 (when the expanded $11.4 million-per person transfer tax exemption is in place) without fear of any kind of “clawback” if the client dies in a later year, when the exemption is lower. This means that clients can take steps to use up the entire $22.8 million per-married-couple transfer tax exemption between 2019 and 2025 without any fear that they will be subject to transfer tax liability for those gifts in later years.
3. Inheriting an IRA
If a client inherits an IRA, the distribution requirements depend upon whether the client-beneficiary is a spouse or non-spouse beneficiary. A spousal beneficiary has the option of rolling the funds into an inherited IRA or his or her own IRA, and can wait to begin taking RMDs until reaching age 70 1/2. A non-spousal beneficiary cannot wait until age 70½ to begin taking RMDs—he or she must either withdraw all funds within five years or based upon his or her life expectancy. RMDs will depend on whether the original owner died before or after his or her required beginning date.
4. Inheriting Qualified Plan Funds
While inherited IRAs often may be distributed over time, qualified plans (such as 401(k)s and profit-sharing plans) do not allow the funds to be distributed over the beneficiary’s life expectancy. When a client inherits a 401(k), the funds typically must be distributed immediately in a single lump sum payment, resulting in an immediate tax liability for the beneficiary. Most plans will specifically require lump sum distribution treatment because of the administrative burdens associated with allowing stretched out distributions. Fortunately, designated beneficiaries of qualified plans have the ability to roll those funds into an inherited IRA. Because of this, clients should regularly review their beneficiary designations on qualified plans.
5. Formula Trusts Should Be Reevaluated Post-Reform
Many clients have used so-called “formula trusts” in their estate planning to take advantage of the full transfer tax exemption, which changes each year. Like many other estate planning techniques, these trusts will need to be reevaluated in light of the increased estate tax exemption amount. A particularly problematic issue may arise when the formula i n the plan directs that assets up to the exemption amount will be placed into a credit shelter trust, with the remainder placed into a marital trust designed to take advantage of the marital deduction. With the enlarged estate tax exemption, some clients may find that no assets will remain to be transferred to the marital trust. This can present a problem if the surviving spouse is not also the beneficiary of the credit shelter trust (for example, if the decedent’s children are beneficiaries of that trust).
