After years of uncertainty, Congress passed the American Taxpayer Relief Act on January 1, 2013, and made the estate and gift tax exemption of $5,000,000 per person permanent as adjusted for inflation (up to $5,340,000 per person in 2014). With the permanent increase of the estate and gift tax exclusions, along with "Spousal Portability" (which allows a surviving spouse to use the unused estate tax exclusion amount of a deceased spouse), the estate planning landscape for advisors and their clients changed dramatically. The following is a brief review of some of the issues individuals should be aware of in the new estate tax world:
Time to Simplify? It is a simple fact that there are far fewer individuals with wealth exceeding $5 million ($10 million for married couples) than there were individuals with wealth exceeding $1 or $2 million. For many individuals, the estate tax is no longer a drag on their estate plan. Individuals with estates under $5 million no longer need to worry about complex estate tax provisions. Married couples under $5 million in total assets no longer need complex trusts, and can simply allow the entire estate to pass to the surviving spouse after the first death (there are other benefits of using a trust to hold assets for a surviving spouse, but it may no longer be necessary for tax purposes). Many taxpayers are unwinding previous estate tax planning, including terminating life insurance trusts that were created to own life insurance policies in a manner that would exclude the death benefit from estate taxes and liquidating family limited partnerships (or LLCs) that were created to facilitate the transfer of wealth to children through annual gifts. The new estate tax world has opened the door for millions of Americans to simplify their estate plan.
Time to Focus on the Income Tax? The income tax is now a more significant issue for many taxpayers. Under traditional estate tax planning, the assets of the first spouse to die would be transferred to a trust for the survivor's benefit. Such assets would not be subject to estate taxes at the survivor's death, but they also did not receive a "step-up" in basis for income tax purposes. The possibility of paying more in capital gains taxes was accepted because the estate tax rate was higher. Now, more consideration should be given to structuring an estate plan that will have all of the assets included in the survivor's estate so that there is a full step-up in basis at the second death.
Does gifting still make sense? Yes, in the right situations. In fact, with the increased exemption, wealthy taxpayers with estates in excess of $5 to $10 million now have more options than ever to make gifts in ways that can save their family significant estate taxes. Individuals with large estates should still consider gifting to reduce taxes. In particular, now may be a good time for individuals to make a gift of assets that are expected to appreciate significantly in the near future.
In short, the new estate tax laws have dramatically changed the estate planning world. If you haven't already done so, now is an excellent time to review your estate plan and see if what you have in place still makes sense.
The New Estate Tax World, and What It Might Mean to You
By Gregg D. Stephenson, Attorney
Taken from the RAY QUINNEY & NEBEKER Tax and Business Newsletter - Fall 2014