The doubling of the estate tax exemption might mean you do not have to pay that tax. However, if you are not careful, you could end up paying more in capital gains taxes than necessary.
It is assumed by most people that since the federal estate tax exemption was doubled in the tax bill passed late last year, many wealthy families would end up paying a lot less in taxes. However, it is not that simple. In fact, people who already made estate plans around the old estate tax exemption could end up paying more in taxes than necessary. This is because of a popular way of working around the estate tax as the Wills, Trusts & Estates Prof Blog discusses in "Don’t Let New Estate Tax Law Cause Your Family to Pay Unnecessary Capital Gains Taxes."
Many people held assets valued up to the estate tax limit personally. Anything they owned over that amount was put in a trust. However, trusts are often subject to capital gains taxes. Those taxes still need to be paid. However, they are lower than the estate tax rate.
The problem now is that the higher estate tax exemption means people can hold more assets personally. If people do not make changes to their plans, they may pay more in capital gains tax than necessary.
Most people in this situation should not have too much difficulty correcting it. However, they will need to see an estate planning attorney to make the necessary changes to their estate plans.
Many estate planning techniques such as an “A-B Trust” utilized by many estate planning attorneys to avoid estate tax during the era when the federal estate tax exemption was only $675, 000 is outdated after the new tax law was passed. If you already have a trust done many years ago, it may time for you to review the trust with an estate planning attorney to see whether changes need to be made.
Reference: Wills, Trusts & Estates Prof Blog (May 15, 2018) "Don’t Let New Estate Tax Law Cause Your Family to Pay Unnecessary Capital Gains Taxes."
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