The year 2018 has been one of significant change in estate planning law, beginning with the Tax Cut and Jobs Act (the “Federal Tax Law”) which took effect on January 1, 2018 and Vermont’s new Will and Probate Law (the “Vermont Law”) which became effective July 1, 2018. Both of these laws involve major changes and will affect how we advise you on your tax and estate planning.
Federal Tax Law
The Federal Tax Law dramatically increases the estate tax exemption amount through 2025. The new exemption is $11.18 million per person. With such a high exemption, the number of estates subject to estate tax will drop significantly. That is very good news for taxpayers whose estates would have been subject to a lower estate tax exemption under the previous law.
Increased Federal Estate Tax Exemption and Stepped-Up Basis for Income Taxation
With the high estate tax exemption reducing estate tax exposure and with assets subject to estate tax receiving the date of death step-up in income tax basis, whether or not an estate tax is paid, estate planning to lessen estate taxes may not be the optimum tax plan under the Federal Tax Law. This reality means it is important to review one’s estate plan with this new tax structure in mind. Additionally, an important note is that gifted assets do not receive any income tax basis step-up.
Change to Personal Income Tax Deductions
There is also good news for most taxpayers on the income tax front, although the state and local tax deduction limits included in the Federal Tax Law will actually result in an income tax increase for some taxpayers. The Federal Tax Law now limits the personal income tax deduction for state and local taxes to $10,000 per person/couple. While many people will adjust to this new reality, an opportunity exists which may allow individuals and couples to capture multiple $10,000 deductions by conveying their real estate to multiple irrevocable trusts or other appropriate entities.
Tax Savings Opportunities for Business Owners
Business activities may also be structured to take advantage of the new 20% pass thru entity deduction. This deduction is not available to C corporations, but C corporations have the benefit under the Federal Tax Law of the much lower corporate tax of 21% instead of 35%.
Annual Gift Exclusion Increase
One additional benefit that 2018 brought, due to the inflation indexing, was an increase in the annual exclusion amount from $14,000 to $15,000. The annual exclusion amount is the amount that an individual may give to any number of individuals in a calendar year without incurring gift taxes or even having to file a gift tax return.
Vermont Will and Probate Law
While the Vermont estate tax exemption amount of $2.75 million per taxpayer remained unchanged in the recent legislative session, a major re-write of Vermont law regarding Wills and probate administration was enacted and became effective July 1, 2018. The more notable changes are presented below.
One major change is that Vermont will now allow self-proving Wills. “Self-proving” means an affidavit signed by the witnesses is added at the end of the Will. Under previous law, the probate court would only allow a Will if either all of the decedent’s heirs at law consented to the allowance of the Will, or a hearing was held with the witnesses giving testimony to confirm the Will was properly signed. Under the new law, the courts will allow Wills without a hearing if they are executed with the new self‑proving affidavit. This means a more streamlined process for the allowance of Wills. The benefit of self-proving Wills cannot be overstated for ease and efficiency of Will allowance, and we therefore recommend the execution of new Wills to incorporate this new benefit.
The Vermont Law also allows an executor to move forward with the sale of the estate’s assets in a more streamlined manner, if the Will specifically allows for such sales. Finally, estate administration can be significantly less burdensome if the probate estate involves no real estate, highlighting the benefit of re-titling assets, particularly real estate, in a manner to avoid probate.
Do the beneficial changes in these new laws eliminate your need for comprehensive estate planning?
There are many issues to be addressed in the estate planning process, beyond tax planning, including naming your choice of guardian, executor and trustee, avoiding probate, providing for the specific needs of your family, the complexities of second marriages and blended families, and supporting your favorite charities. So the need for a comprehensive estate plan has definitely not been eliminated – the ground rules have just shifted.
In such dynamic times, the estate planning department at Sheehey is ready to help in reviewing your current estate plan in light of these significant changes. If you have any questions, or would like to schedule an appointment to discuss how the new laws impact you, please contact us at (802) 864-9891.
Disclaimer
While the information contained herein is intended to be accurate, it is, nonetheless, presented with the understanding that it does not constitute legal advice or professional assistance in any manner, but rather is offered to guide the discussion. An independent investigation of the current law must always be undertaken before recommending any action or inaction on the basis of these materials.
