Watch Out for the Capital Gains Tax
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 in 2017, many wealthy families would end up paying a lot less in taxes. However, it is not that simple. In fact, people who already created estate plans centered 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.”
Before the federal estate tax exemption doubled, many people held assets valued up to the estate tax limit personally. Anything they owned over that amount was designed to be placed in a trust to minimize estate taxes. However, trusts are often subject to capital gains taxes. Those taxes must still be paid and are lower than the estate tax rate.
The current problem is that the higher estate tax exemption means people can hold more assets personally, and they do not adequately plan to minimize the capital gains tax for their heirs. 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 and perhaps consult with a tax professional to make the necessary changes to their estate plans.
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.”