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New Estate Tax Laws Impact All Family Trusts Created Prior to 2013

New Estate Tax Laws Impact All Family Trusts Created Prior to 2013

by Harley K. Look, Jr.

Now is the time to update your family trust to take advantage of the new estate tax laws.   Everyone with a tax planning family trust will want to look at how the laws impact their trust. 2013 was a watershed year for estate tax planning, and the benefits continue for 2014 and the foreseeable future.  Under the new laws, there is an opportunity to amend your trust to provide the best income tax benefits to your children or other beneficiaries.  Almost all family trusts prior to 2013 sacrificed income tax benefits in order to achieve estate tax benefits, but everyone prefers to have their beneficiaries pay long term capital gains taxes somewhere down the road if there’s a sale after they’re gone instead of estate taxes at their deaths. Moreover, with a family trust, all post death appreciation during the surviving spouse’s lifetime escapes estate taxes upon the death of the survivor.  Estate taxes are currently at 40%; capital gains are taxed generally at 20%.  Estate taxes are assessed on the fair market value; capital gains only on the appreciation of the deceased spouse’s assets in the family trust.  Estate taxes are due at death; capital gains only on sale.  Estate taxes are generally payable all at once; capital gains can be spread out over time.  Estate taxes are due when the assets are usually not liquid; capital gains taxes are due only after there’s been a sale.  You get the idea. Due to the fiscal cliff on December 31, 2012, and a $1,000,000 estate tax exemption, any amounts over that threshold would have been taxed at 39-55%.  For married couples without tax planning trusts, assets usually pass from one spouse to the survivor without any estate taxes, but upon the surviving spouse’s death, all estate taxes are due within 9 months.  Consequently, most trusts prior to 2013 were designed to fully utilize the estate tax exemptions of both spouses instead of only the survivor’s, and if the children or other beneficiaries later sell appreciated assets, they have to pay long term capital gains taxes. Now, with the new tax laws, for the vast majority of clients, it’s possible to get the best of both worlds, no estate taxes and no capital gains taxes.  Most clients are electing to change their trusts so that their beneficiaries will receive better capital gains tax benefits without any estate taxes, but each case depends on the facts, so we’ll be glad to meet with you to give you greater details and let you decide. Our firm has maintained a policy of offering complimentary meetings to review the documents we prepare for our clients, and if we make changes, then there would be a fair fee only for those changes.  We also offer new clients a complimentary initial meeting to discuss their current estate plans. We would be pleased to educate you as to the pros and cons of making any changes to your trusts while reviewing other changes in the law or your circumstances.

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