How Can Estate Plan Documents Be Modified For An Incapacitated Person?

Bush Estate Tax Cuts expire December 31, 2025 – Here is what you need to know.

In 2001 and 2003 under President Bush temporary tax cuts were enacted through through two pieces of legislation: the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). Both measures were renewed in 2012 and 2017. Some of these tax cuts that have been enacted over the past 20 plus years are set to expire December 31, 2025, such as the Estate and Gift provision from the Tax Cuts and Jobs Act (TCJA) of 2017.

Estate and gift taxes – current law

The estate and gift provision in the TCJA of 2017 had a major impact on many people who may have a taxable estate in the future. The TCJA doubled the federal lifetime gift tax exemption amount, from $5.49 million in 2017 to $11.18 million in 2018 per individual. Under the TCJA, this higher exemption amount was then indexed for inflation in each subsequent each year.

In 2024, each individual has a combined federal estate and gift tax exemption of $13,610,000 (less any prior gifts made during life). This means that for federal tax purposes, in 2024 an individual can make lifetime gifts totaling up to $13,610,000 to anyone or transfer at death up to $13,610,000 (less any gifts made during life) to anyone without triggering the imposition of the federal estate and/or gift taxes. Married couples have a combined exemption, allowing them to make gifts during their lifetimes totaling $27,220,000. Any gifts during life or transfers at death with a value in excess of the available exemption amount will be subject to a federal estate and/or gift tax at a rate of 40%.

Estate and gift taxes – consequence of expiration of current law

After December 31, 2025 exemptions from estate and gift taxes will revert to pre-TCJA levels of around $5 million, adjusted for inflation. The lifetime gift and estate tax exemption, which was more than doubled by the 2017 tax reform bill, will go up with inflation in January 2025, then go down to near-2017 levels in January 2026 unless and until Congress steps in. If no action is taken by Congress by the end of 2025, then under the current law, on January 1, 2026, the federal lifetime exemption amount will be reduced to approximately one-half of the current value. Based on the rate of inflation, the exemption as of January 1, 2026 will be approximately $7 million per person.

We recommend that you review your assets, income and living expenses, then project those numbers out for your expected lifetime. Any excess assets remaining after your projected lifetime expenses is what you should consider to include in a revised estate plan that will not be burdened by a decrease in the estate and gift tax exemption.  Not taking full advantage of the gift tax exemption before it drops in two years could result in a much smaller estate for your heirs.

Leverage 2024 gifting limits

Based on the 2024 gifting limits a direct gift of cash, securities or other assets with a value up to the lifetime exemption is a simple was to gift money or part of inheritance. Furthermore, you can use the annual gift tax exclusion — $18,000 in 2024, $36,000 for couples — to make yearly gifts to as many people as you like. For example, you can make a payment directly to a school to cover a child’s or grandchild’s tuition, or to a medical provider for health expenses, without incurring taxes. Neither “free” nor annual exclusion gifts count toward your lifetime gifting limit, and these rules are not slated to change in 2026.

Family Limited Partnerships or LLC’s

For estates that have substantial real estate holdings, it is beneficial to have such real estate owned by a limited liability company (“LLC”) and then all of the LLC interests owned by a Family Limited Partnership (“FLP”).  As the owner of an FLP, you can then make gifts of limited partner interests in the FLP to family members at gift tax values that are discounted for lack of marketability and minority interests.  These discounts essentially provide a great mechanism by which you can leverage your gift tax exemption to reduce your taxable estate.  As the general partner of the FLP, you still control the management of the LLC’s.

Irrevocable Trusts

Rather than gifting cash or assets, alternatively, an irrevocable trust permits withdrawals based upon a schedule and conditions that you determine. This allows you to maintain a level of control over how and when the beneficiaries will receive distributions. When choosing which assets to gift or place in a trust it is important to look at what assets or gifts you expect will keep growing. When you gift assets using your lifetime gift tax exemption, the assets are transferred at today’s value, and there’s no tax to the beneficiaries. You can gift these assets using your lifetime gift tax exemption, allow heirs to have the current benefit and the gift or asset may experience appreciation in future years. It is important to have a skilled trusts and estates attorney draft documents, such as trust, so there are no issues with your estate.

How Can You Modify Estate Plan Documents For An Incapacitated Person?

If you have an incapacitated parent who has not done any estate planning including not having executed a will or a revocable living trust or his or her documents are outdated, getting his or her estate in order is extremely important. In California, there is a special law available in regard to setting up an estate plan for an incapacitated parent. Under California Probate Code §2580, the Courts have the power to create a “Substituted Judgment”.  Under such law, an interested party may file a petition to take a proposed action to: (1) benefit the conservatee or the estate, (2) minimize taxes or expenses of administration of the conservatorship estate or of the estate upon the death of the conservatee, or (3) make gifts to likely donees if the conservatee had capacity. Using this law could help avoid probate and save heirs on estate taxes when one’s incapacitated parent dies.

There are many factors for the Court to consider when determining whether to approve a petition for substituted judgment.  California Probate Code §2583 lists some factors, but the Court may consider other factors not listed in the Probate Code.  Some of these factors include whether the conservatee has capacity to carry out the proposed transaction, the wishes of the conservatee, prior estate planning documents, changes in the law that the conservatee may have considered in making changes to his estate plan, and the likelihood that the conservatee would have taken the proposed action.  The petition has to address all of the relevant factors listed in the Probate Code and any others that it is believed the court may consider. Furthermore, any trust created under a substituted judgment order is subject to the California Rules of Court that govern court created trusts. These rules include the trustee obtaining a bond, filing accountings with the court just like in a conservatorship of the estate, and requiring court approval of any modification or amendment.

What Should You Do?

When it comes to being ready for changes in the tax laws – two years may seem like a lot of time to adjust an estate plans, however, unless you’re simply making large cash gifts, developing a new plan will involve detailed conversations and analysis. Whether your existing estate plan was created recently or a while ago having a conversation with your estate attorney now can help you make better-educated decisions about your family’s future. Furthermore, drafting of documents and trusts can be done by a professional tax and estate attorney who can guide you through the complexities, nuances, and changes in estate and gift tax law.

That is why it is worth reaching out to a Trusts and Estates and/or Probate Attorney such as the at the Law Offices Of Jeffrey B. Kahn, P.C. We are always thinking of ways that our clients can save on taxes, trusts and estates planning, and probate matters. Whether or not a will exists, the expertise of a skilled lawyer at the Law Offices Of Jeffrey B. Kahn, P.C. is needed to help protect the interests of the parties involved. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax and probate matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.