High net worth? Estate plan is essential

Dec. 20, 2018

This paid piece is sponsored by Eide Bailly LLP.

By Tom Pruner, CPA, PFS, CFP, AEP and tax partner

Estate planning may not be on the top of your to-do list right now, but for those who are high-net-worth individuals, this financial chore is essential. If a carefully developed tax strategy is overlooked, high-income earners may miss out on some new tax breaks.

Tax act changes

The combination of the 2012 and 2017 tax acts have changed tax planning for wealthy individuals. Not too long ago, the basic exclusion amount for estate taxes was $600,000, and the highest marginal estate bracket was 55 percent, while the highest income tax bracket ranged from 28 percent to 39.6 percent. Now, the basic exclusion amount is $10 million and, with allowed inflation indexing, calculates to more than $11 million — sunsets back to $5 million plus inflation in 2026 — the highest estate tax bracket is 40 percent, and the highest income tax bracket is 37 percent. But Congress made no changes to the step up in basis rules. When an individual dies, the tax basis of assets is adjusted to the value at date of death. So you can see that in today’s tax environment, because of the higher estate exclusion, for most people, income taxes are more important than estate taxes.

Surviving-spouse assets

The 2012 tax act also made permanent the new concept of portability. Portability is an election that allows the surviving spouse to use the unused exclusion amount of the first deceased spouse, so there is no need to fund a credit shelter trust for the first spouse who dies to use their basic exclusion. The assets in the credit shelter trust do not receive a step up in basis when the surviving spouse dies. If those assets have appreciated in value and are sold, a gain will be recognized, and income taxes will be paid. With portability, however, you can structure the estates so that all assets will receive a second step up in basis when the survivor dies and eliminate any income tax if the assets are sold.

Past estate planning document obsolete?

Because of the changes in the 2012 and 2017 tax acts, most estate planning documents created before 2012 may now be obsolete. If the net worth of a couple is below $11 million, the main consideration should be to ensure the step up in basis for all assets upon the death of the surviving spouse. For a couple with a net worth of more than $11 million but less than $22 million, the credit shelter trust may still make sense for several reasons.

High-net-worth couples

For couples with a net worth of more than $22 million, all the estate planning techniques that a planner used in the past are still appropriate. These strategies include:

  • Grantor retained annuity trusts
  • Charitable remainder trusts
  • Charitable lead trusts
  • Spousal lifetime access trusts
  • Irrevocable life insurance trusts
  • Family limited partnerships
  • Installment sales to grantor trusts and dynasty trusts

Estate planning review

Eide Bailly’s wealth and transition service team can review your estate planning documents and provide a one-page diagnostic outlining the key provisions as well as considerations for possible updates. Contact Tom Pruner at 605-339-1999 for information.

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High net worth? Estate plan is essential

Thanks to changes in tax law, a lot has changed in estate planning. If you’re a high-net-worth individual, this is a must-read.

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