Making Changes to Your Estate Plan

As you may know, the estate tax exemption is $5 million per person. This is substantially higher than the previously scheduled exemption amount of $1 million per person. With proper planning a married couple can now pass up to $10 million in wealth to their heirs free of federal estate tax.

Life Insurance Policy?

If you are married and your estate is less than $10 million, you may be wondering what you should be doing now. Maybe you set up your estate plan with the expectation that the estate tax exemption would revert back to $1 million per person. You may have set up a credit shelter trust to take advantage of the exemption amount for two people. If your estate is over $2 million, maybe you also have a life insurance policy and an irrevocable life insurance trust (ILIT).

Change in the Estate Tax Exemption

The change in the estate tax exemption amount creates a quagmire for people with estates of less that $5-$10 million especially if they’re paying on a life insurance policy they think they’ll never need. If the only reason they bought the life insurance in the first place was so their heirs could pay the estate taxes, they might be tempted to stop paying the premium.

Not So Fast

Under the new tax law, the estate tax exemption is temporarily $5 million per person. It’s only for a two year period. This hasn’t been getting much play in the media but what happens after two years is anyone’s guess.

A Moving Target

I always tell my clients that the estate tax is a moving target. One year the estate tax exemption is $3.5 million. The next year there is no estate tax and thus no need for an exemption. The following year, it’s scheduled to be $1 million per person. But wait! Instead of $1 million, its $5 million but for ONLY TWO YEARS.

Since we have NO IDEA what the estate tax will be in the future, we all have to be VERY CAREFUL about making changes to our estate plan based on the assumption that the exemption amount will remain where it is today.