Revisiting One's Estate Plan in 2017

By Ronald A. Fatoullah, Esq. and Debby Rosenfeld, Esq.

{4:33 minutes to read} Most people procrastinate when it comes to getting their affairs in order. Drafting wills and signing advance directives automatically reminds people of their mortality. We relish our independence and good health, and executing powers of attorney and health care proxies reminds us of potential incapacity down the road. So, when individuals finally address these issues head-on and decide to meet with an attorney, it is disconcerting to hear that estate plans that are drawn up must be revisited after a certain period of time. We typically tell clients that their estate plans should absolutely be reviewed if there is a major change in their lives-for example, a significant increase in assets or a falling out with a family member. That notwithstanding, estate planning documents should be reviewed at least every five years.

However, our current year-2017-poses different concerns. The Republican Party is now controlling the White House and both houses of Congress. While no new laws have yet been enacted on a Federal level, there is talk about significant changes being made to estate tax laws as we know them. Many legislators are advocating for a complete repeal of the Federal estate tax. At this time, individual taxpayers can pass up to $5,490,000 in assets free of Federal estate taxes (New York State has a lower threshold of $4,178,500, which will increase on April 1st). Because of the significant amount of assets that can currently pass free of tax, the repeal will not affect a good portion of the population. However, the changes to the estate tax law might also include the elimination of the step-up in basis upon death.

Basis is the actual cost of an asset. The basis of an asset is used to determine the amount of capital gains taxes upon the sale of such asset. If one pays $250,000 for a home, $250,000 is its basis (assuming no capital improvements have been made). If the house is sold during the person's life for a higher amount, i.e., $750,000, the difference (i.e., gain) will be subject to a capital gains tax (there is a $250,000 capital gains tax exclusion if one sells a home that he/she owned and lived in for two of the past five years). The current law provides that when an individual who owns property dies, any property in the estate of such individual gets a step up in basis. If the home increased in value to $750,000 but was retained by the individual until his/her demise, such amount will now be the new basis or starting point for calculating gain. If the decedent's children sell the house, they will not recognize any capital gains taxes. If this law is repealed, there may be significant capital gains taxes when a person dies and his/her property is then sold. (Note: The contemplated law, if passed, may only apply to individuals with assets over $10 million.)

The potential repeal of the step-up in basis rules will impact how people manage their assets. Until now, most people have held onto highly appreciated assets until they die so that capital gains taxes can be avoided or minimized. If people needed money, they typically tapped into assets that had not appreciated significantly in value. Further, because there has been an automatic step up in basis upon death, people with poor records regarding the initial purchase price of the assets have not been penalized. Even if the purchase price of the house in the above example was unknown, it would not matter because there would be a step up in basis upon death anyway. If the rules regarding step up in basis are repealed, people will have to be far more meticulous in their record keeping. The initial cost of each asset (including stocks, etc.) will have to be retained in order to compute capital gains taxes upon the sale. If new laws are enacted, people will ultimately engage in more income tax planning to minimize any tax bite.

This year is perhaps a good one to revisit one's estate plan and to keep a close watch on the forthcoming legislation.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Debby Rosenfeld, Esq. is a senior staff attorney at the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Advice Period, a wealth management firm, and he can be reached at 424-256-7273.