Estate Planning In Light of the Passage of the TCJA
Since the passage of the Tax Cuts and Jobs Act (TCJA), we have received several inquiries regarding the necessity of an estate plan. With the TCJA, Congress increased the Estate and Gift Tax exemption to $11,200,000 for individuals, and $22,400,000 for married couples (double the amount for individuals). As a result, is a Trust still necessary? Answering this question will be the focal point of this blog post.
For readers who can't contain their excitement, the short answer is yes! However, before proceeding, it is important to note that even prior to the passage of the TCJA, many individuals and families were not subject to the Estate and Gift Tax. Prior to the TCJA, individuals were able to exclude up to $5,490,000 in 2017, and married couples $10,980,000. Most Americans were far from these exemption limits.
Retain Control Over Who Get’s What, and How Much
For the vast majority of Americans, the primary motivation for an estate plan is not the avoidance of taxation, but rather, avoidance of probate. In the State of California, if you die without a Will, Trust, or other distribution method, the State will direct the distribution of your entire estate pursuant to the laws of intestate succession.
Contrary to conventional wisdom, the State does not automatically take your property. The laws of intestate succession (which are essentially default rules), will distribute your assets according to a priority established by the State. However, these default rules cause two significant problems.
First, your property may be distributed to people you do not want. The default rules direct who receives your property if you pass away without a Will or Trust. As a result, you lose control of who gets your property and the State will decide for you. Second, the default rules determine the amount that passes to each person. Therefore, even if the property passes to someone you prefer, it may not be the amount you desire.
Executing a Will or Trust avoids these (and many other) complications. You, the individual, retain control over the final disposition of your assets and can ensure that (1) your property goes to the person or entity you desire and (2) direct the amount that passes to each beneficiary.
Avoid Costly Probate
Many families with modest estates question the necessity of an estate plan. We are often asked, “I only have one house, two cars, jewelry, and household furnishings. Why do I need an estate plan?”
First, as discussed above, an estate plan allows you to retain control over who gets your assets, and in what amount. Without directing the disposition of your assets, the State of California will make that determination for you. You worked tirelessly throughout your life and the State of California should not determine who receives your assets after you pass away.
Second, without a trust or some other distribution method (such as joint tenancy), your estate will be placed into probate proceedings. Probate refers generally to the process by which the probate court disposes of assets upon your death. Absent some other distribution method, failing to place property into a Trust will generally cause your estate to be placed in probate proceedings. Even a Will requires probate proceedings. For this reason, creating a trust is of paramount importance.
So what is the problem with probate? The primary concern, in addition to not retaining control over the disposition of your assets, is the astronomical cost. Probate proceedings often swallow the value of most assets. After the dust settles, not only will the probate process have taken 1-2 years (depending on the size of your estate), but the amount that passes through to survivors will be far less than the amount that would have passed with a Trust.
Laws Are Constantly Changing
Partisanship on Capitol Hill is arguably at its apex. At no time in history have the parties disagreed so greatly on matters of critical importance. Compromise is a foreign language, and leaders of both parties are fixated on obtaining power only to reverse and dismantle what the previous power holders did. In fact, shortly after passage of the TCJA, Democratic leadership had already turned their attention to the next election and overtly promised to repeal much of the TCJA.
Therefore, assuming you are in the small group of Americans subject to the Estate and Gift Tax, having a carefully drafted estate plan should still be a priority. Relying on the increased exemption limit is not recommended since (1) it may be repealed when, and if, the Democrats obtain power and (2) the increased exemption expires at the end of 2025.
Medi-Cal Estate Recovery
Prior to January 1, 2017, Medi-Cal Estate Recovery had the right to recover Medi-Cal benefits paid to a decedent during his/her life. This included benefits paid for both medical and long-term care costs. Medi-Cal recovered benefits paid by collecting from the decedents estate. This included property held in joint tenancy, as well as property titled solely in the decedents name.
This Medi-Cal recovery mechanism forced survivors, most often surviving spouses, to sell the family home and/or other assets to pay for Medi-Cal benefits. Effective January 1, 2017, however, Medi-Cal reimbursement is limited to assets which pass by way of the deceased Medi-Cal recipients probate estate. Property placed into a valid living trust, whether revocable or not, is not within a decedents probate estate.
The significance of this law cannot be overstated. By creating and transferring assets into a living trust, a decedents estate will generally avoid probate, and thus, will not be within the reach of Med-Cal Estate Recovery. A living trust essentially shields your assets from recovery by Medi-Cal and preserves your estate for those nearest and dearest to your heart.
To bring this all together, the primary factor for having a Will and Trust for most Americans continues to be the avoidance of probate and retention of power over who gets your assets, and in what amount. Medi-Cal only adds to the necessity of an estate plan. Although the TCJA significantly increased the exemption amount, for the vast majority of Americans, it is not a factor that should weigh against having an estate plan.
Finally, note that this post is a limited discussion of why having an estate plan is critical for every individual and family, irrespective of age. Going through each factor weighing in favor of drafting an estate plan would be a futile task. However, this discussion sheds light on some of the most important motivations individuals have for creating an estate plan, and makes clear that these motivations persist in the post-TCJA era.
How We Can Help You
The Wills and Trusts attorneys at Randhawa Hundal LLP have assisted many families in the greater Sacramento and Roseville region navigate the intricacies of estate planning. You and your loved ones should have the peace of mind that everything, including themselves, will be provided for. Whether you need to care for a child with a disability, ensure that children from a different marriage receive their fair share, or have any other concern to address, our Estate Planning Attorney’s will assist you. Call us today for a FREE CONSULTATION.
Revocable Transfer on Death Deed
Effective January 1, 2016, residents of California can use a new deed to transfer certain pieces of real property upon their death. The revocable Transfer on Death deed ("TOD") allows individuals to transfer the following types of real property:
- property that contains one to four residential units
- a condominium unit, or
- a parcel of agricultural land of 40 or fewer acres that includes a single-family residence.
One benefit of the TOD is it is fully revocable during the transferor's lifetime. A person making use of this deed, therefore, is free to make changes after its execution.
The largest benefit, however, is probate proceedings are not applicable to property transferred via a TOD. Prior to 2016, real property that was not distributed via a trust or will was subject to the probate process -- which can be long and cumbersome. As a result, a TOD is a highly effective way to make a testamentary disposition of a specific piece of real property.
In the event you have one of the aforementioned pieces of real property and do not have an estate plan in place, a TOD is an effective alternative.
If you have any questions, please do not hesitate to contact our office.
The Benefits of Setting Up An Estate Plan
One of the most important, but often overlooked, decisions every individual should make is ensuring the orderly disposition of their assets upon their death. Having a well thought out estate plan carries with it numerous benefits. Some of which are:
- Preserving your wealth
- Protection of assets (homes, businesses, real property, securities, etc.,)
- Ensuring any businesses you own continue to operate as normal
- Avoiding the costs and stresses of the probate process
- Preventing fighting within the family
- Ensuring the financial well-being of children
- Having the power to distribute your property the way you would like and how you would like
- Ensuring children with special needs can continue to receive government assistance and benefits
- Ensuring healthcare decisions pertaining to you are made by ones you trust and value the most
- In the case of incapacity, ensuring financial decisions are made by those who you value most
- In the case of individuals with children from prior marriages, ensuring the distribution of your estate does not exclude those children from prior marriages
Another important consideration for individuals with larger estates is whether the federal estate and gift tax will be implicated in the administration of their estate. In such cases, it is imperative to implement an estate plan that can minimize tax consequences during administration. There are a variety of strategies that can be used in order to mitigate tax implications. In summary, having a well thought out estate plan provides your family with peace of mind at a time that is most trying in addition to maximizing the overall value of your estate.
Randhawa Hundal LLP Roseville Estate Planning Services:
While we will also assist you in drafting your estate planning documents and portfolio, we will also be with you every step of the way, here to answer any questions you may have.
Our estate planning package includes the following:
- Living Trust (Revocable)
- Advance Health Care Directive
- Durable Power of Attorney
- Pour-Over Will
- HIPAA and CMIA Authorizations