Estate Planning for Singles: Current Rules May Dictate Changes

Posted on Monday, August 13, 2018

Legislation enacted a few years ago made permanent changes to the federal estate and gift tax rules.

Specifically, here are the significant estate changes in the American Taxpayer Relief Act:

The 2018 federal estate tax exemption is $11.18 million for estates of individuals who die in 2018 (up from $5.49 million in 2017). A 40% tax rate applies to the value of an estate in excess of the $11.18 million exemption.
The federal gift tax exemption is also set at $11.18 million for 2018 (up from $5.49 million in 2017). Gifts in excess of the $11.18 million exemption will be taxed at 40%.

This is all good news, but your estate plan may need an update to take advantage. Here is what unmarried individuals need to know for 2018.

What is Included In Your Taxable Estate?

First, calculate the value of assets including:

Cash, stocks and bonds;
Intangible investments such as patents, trademarks and copyrights;
Real estate;
Automobiles, boats and airplanes;
Life insurance, including proceeds from policies on your own life;
IRAs, 401(k)s and pensions;
Inheritances; and
Jewelry, art and collectibles.

Then, subtract your total liabilities from your assets to get your net worth. Include liabilities such as:

Credit card and other revolving debt;
Secured and unsecured notes payable, such as home equity loans and automobile loans;
Mortgages;
Margin trading accounts; and
Life insurance loans.

Singles With an Estate of Less than $11.18 Million

If your estate is worth less than $11.18 million and you die in 2018, everything you own can be left to relatives and loved ones without any federal estate tax bill.

However, you still may need to be aware of implications to your estate. Let's say you had estate planning documents drawn up years ago that directed the executor of your estate to make enough charitable donations to get the value of an estate below the exemption amounts that applied in previous years. These amounts were much smaller than $11.18 million in previous years, (for example, $3.5 million for 2009). If this is your situation, the bigger $11.18 million exemption gives you the opportunity to leave more to relatives and loved ones (and less to charity) without any federal estate tax.

Singles With an Estate of More than $11.18 Million

You might want to change your estate planning documents to direct the executor to give away more to IRS-approved charities in order to get your taxable estate below the $11.18 million threshold.

Put another way, up to $11.18 million can be left to relatives and loved ones without any federal estate tax hit if you die in 2018. If you leave more, there will be a federal estate tax bill to pay. But the taxable value of your estate is reduced by donations that the executor of your estate is directed to make to IRS-approved charities. Of course, increasing such donations means less for relatives and loved ones.

Consult with your estate planning attorney for other steps you can take to reduce your taxable estate. Here are three options:

1. Make annual gifts of up to $15,000 to relatives and loved ones. Thanks to the annual federal gift tax exclusion, such gifts will reduce the taxable value of your estate but they will not reduce your $11.18 million federal estate tax exemption or your $11.18 million lifetime federal gift tax exemption. For example, say you have two adult children and two grandchildren. You could give them each $15,000 this year for a total of $60,000 (4 times $15,000). Then, you could do the same thing again next year. Your taxable estate would be reduced by $120,000 (2 times $60,000) with no adverse federal estate or gift tax effects. (In 2017 the annual gift amount was $14,000.)

2. Pay college tuition expenses (not room and board) or medical bills for relatives and loved ones. You can give away unlimited amounts for these purposes without reducing your $11.18 million federal estate tax exemption or your $11.18 million lifetime federal gift tax exemption — as long as you make the payments directly to the college or medical service provider.

3. Give away appreciating assets to relatives and loved ones while you are still alive. Thanks to the generous federal gift tax exemption, you can give away up to $11.18 million worth of appreciating assets right now without triggering any federal gift tax hit. This can be on top of cash gifts to relatives and loved ones that take advantage of the $15,000 annual exclusion and on top of cash gifts to directly pay college tuition or medical expenses for relatives and loved ones. Important: if you make gifts that chip away or use up your $11.18 million federal gift tax exemption, your $11.18 million federal estate tax exemption will be reduced dollar-for-dollar. But that's okay if you're giving away appreciating assets — because the future appreciation will be kept out of your taxable estate.

Finally: Your estate planning attorney can help optimize your estate plan under the current rules. Be sure to consider any state estate tax rules that are applicable when making changes to reflect the federal estate tax rules. Your estate planning attorney can advise you on that too.

Posted in Estate/Trust

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.