High-net-worth clients who recently lost a spouse should consider how the new tax law will affect their wealth.

For example, the Tax Cuts and Jobs Act increased the estate tax exemption to $22.4 million for a couple, an amount that will increase with inflation before the exemption sunsets after 2025. “The significant jump in the federal exemption amount leaves many a HNW client with a false sense of security when it comes to estate planning,” said Martin Abo, CPA with Abo and Company and Abo Cipolla Financial Forensics in Mount Laurel, N.J.

In the year of death, the decedent’s income is included on the jointly filed tax return with the surviving spouse. Estate tax is on the value of the taxpayer’s share of the marital community, as well as any sole and separate property. “This is not income tax, which is related to gains of those assets, but the fair value of the assets themselves,” said Aaron Blau, a CPA in Tempe, Ariz. “Generally, there is no tax on the first spouse to die, and if the return is properly filed any exemption which goes unused by the decedent spouse can be transferred to the surviving spouse.”

“The decedent will [often] have various accounts titled in different ways that have varying tax consequences,” said Mary Kay Foss, CPA in Walnut Creek, Calif. They may include:

• Individual Retirement Accounts. If the decedent was receiving required minimum distributions, a distribution is required in the year of death. If the decedent didn’t take it before death, the beneficiary is required to take it to avoid a 50-percent penalty. If the surviving spouse is the beneficiary, any amount in excess of what the decedent was required to take can be rolled over into a new or existing IRA for the spouse. The RMD is not reported by the estate or by the trust unless the estate or trust was the beneficiary of the IRA.

• Taxable investment accounts that generate dividends and interest. Each sale transaction will have a date of sale. The cost basis of securities sold after the date of death will be adjusted to the value on the date of death.

• Pensions. Separate tax forms will be produced for the decedent and the survivor if the survivor becomes the beneficiary of the pension.

The new tax law does create estate planning opportunities to trim other taxes. For instance, “since a lot more people may now be within the higher exemption amounts, there can be a shift in focus from avoiding estate taxes to minimizing capital gains tax,” said Eric MacCollum, CPA with SC Associates in Middletown, Del.

“Estates and trusts have the highest possible income tax rates,” Foss added. “It’s generally best to have post-death income taxed to an individual rather than to the entity. This is accomplished by paying income from the trust or estate to the trust beneficiary – but … to pay income out of an estate you need court permission. The delay could trap some income to be taxed at a high rate before it’s allowed to be distributed.”

And don’t let the increased federal estate exemption distract you and your wealthy client from state estate tax issues. “New Jersey repealed its estate tax while leaving its inheritance tax,” Abo said. “Many estate-planning colleagues believe such a repeal may only be temporary and the mechanisms are in place to see it reinstituted. Beginning in 2019, the New York state estate tax exemption will be $5 million … or approximately half of the new federal exemption. In Massachusetts, the state exemption is stuck at $1 million.”

First « 1 2 » Next