Important Changes to Estate Planning
By Lisa Osofsky
The American Taxpayer Relief Act of 2012 (ATRA) - effective as of January 1, 2013 - provided some stability in the area of
estate, gift and generation skipping transfer (GST) tax. The basic unified exclusion (“exclusion”) for gift and estate taxes was
increased to $5,000,000, indexed for inflation on an annual basis, and the concept of portability (as discussed below) became
permanent. This re-unification of the exclusion brought unprecedented opportunities to gift assets and transfer wealth.
Exclusions and Rates: For 2015, the basic exclusion amount is $5,430,000 and the top tax rate on transfers in excess of the basic exclusion amount remains 40%. In addition to the basic exclusion from estate tax at death, annual exclusion gifts, indexed for inflation, are still available for lifetime gifts of a present interest (one in which the donee has all immediate rights to the use, possession and enjoyment of the property and income from the property). The annual exclusion for 2015 is $14,000. Annual exclusion gifts to grandchildren, if properly structured, will also not be subject to GST. In addition, if you directly pay for someone else’s education or medical bills, you need not be concerned with any potential gift tax or GST consequences. Gifts which qualify as transfers for education or medical expenses will not use up your annual exclusion or your basic exclusion. Because no dollar limits exist on qualified educational or medical expense transfers, this can be an effective and relatively easy estate reduction tool
Portability: ATRA made permanent the concept of portability, which was first introduced in 2010, initially applying only to the estates of decedents who died in 2011 and 2012. Now applicable to all estates created in 2013 or later, this provision permits the estate of the first spouse to die (“the deceased spouse”) to elect that any unused amount of the deceased spouse’s basic exclusion (“Deceased Spouse’s Unused Exclusion or DSUE”) pass to the surviving spouse. As a result, the amount that the surviving spouse can shelter from gift or estate tax is the surviving spouse’s basic exclusion plus any DSUE received from the deceased spouse. Prior to portability, each spouse’s exclusion was a “use it or lose it” proposition. If total spousal assets exceeded the exclusion amount and assets passed entirely from one spouse to the other, the first spouse’s exclusion was wasted and substantially higher taxes were ultimately paid. Keep in mind that portability does not apply to transfers which may be subject to GST tax, so that the amount each person can pass to a grandchild or younger descendant will still be limited to the basic exclusion amount. In order to take advantage of portability, it will be necessary for the executor of the deceased spouse’s estate to file a federal estate tax return even for those estates which are below the basic exclusion amount.
Step-Up or Step-Down in Basis: Under ATRA, assets received from a decedent will continue to receive an adjustment in basis (“step-up” or “step-down”), so that the basis of an inherited asset will be equal to the fair market value of the asset at death (or in certain cases, as of the alternate date of valuation - which is either six months after the date of death or earlier if the asset is sold before six months). It is important to note that this “step-up” or “step-down” in basis is not applicable to all types of assets. State Taxes: Although the federal basic exclusion is $5,000,000 indexed for inflation ($5,430,000 for 2015), state estate and gift taxes do not necessarily follow these rules. Some states have no estate or gift tax, and others have an estate tax with no gift tax or have different thresholds triggering these taxes. In addition, some states have an inheritance tax.
New York – Estate tax exclusion currently $2,062,500, gradually increasing until it is equal to the federal exclusion amount for decedents dying on or after January 1, 2019. The top estate tax rate is 16% and there is no gift tax. Gifts made within three years of death will be included in the gross estate of a New York resident decedent, if thegift is made between April 1, 2014 and December 31, 2018, and the decedent was a New York resident at the time of the gift. Certain types of property gifted by a New York resident are exempt from these rules.
New Jersey – Estate tax exclusion of $675,000 with a top rate of 16% and no gift tax. There is also a separate inheritance tax ranging from 11% to 16% on the transfer of real and personal property to certain beneficiaries.
Connecticut – Estate tax exclusion of $2,000,000 with a top rate of 12% and a gift tax once gifts made after 1/1/05 exceed $2,000,000.
Pennsylvania – Separate inheritance tax with rates that range from 4.5% to 15% depending on the relationship of the beneficiary to the decedent (transfers to the surviving spouse or to parents are exempt) and no gift tax. While the uncertainty surrounding the federal transfer tax system prior to the passage of ATRA has subsided in certain respects, significant planning challenges remain - particularly in the area of state estate taxes and the useof credit shelter trusts versus reliance on the now-permanent portability provisions. Talk to your WeiserMazars advisor to discuss strategies to take advantage of the current planning opportunities for you and your family.
The new simplified method will make taxpayers’ lives easier, but can put certain deductions at risk.