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.

Estate Tax Exemption Increases to $5.34 Million for 2014

by Harley K. Look, Jr.

The estate tax exemption is $5.34 million for 2014.  If your personal representative timely files a proper estate tax return, the surviving spouse may preserve the deceased spouse’s unused tax credit. This is called portability and for now it is permanent.  In other words, with portability, married couples can shelter a combined $10.68 million. While estate taxes may not currently be an issue for many Americans, there is still a vital need for estate planning, and for those with trusts, you may simply want to amend your trusts, but not abandon them.  There are still nontax benefits to maintaining your trusts such as protecting your heirs, making sure they get what’s left instead of predators and creditors, providing for a fair and equitable distribution among all of your beneficiaries rather than only the surviving spouse’s next of kin, protecting assets in the case of remarriage by the surviving spouse, probate avoidance, and management of assets in the event of mental incapacity. You cannot rely on portability to shelter any excess over the estate tax exemption if for instance there is a divorce, because portability works only if there is a surviving spouse. Even with portability, there is also the risk that if one of you passes away, and the personal representative files for portability, the statute of limitations will remain open to allow the IRS to determine the deceased spouse’s unused exclusion amount available for use by the surviving spouse. If the surviving spouse remarries and the new spouse also passes away, the surviving spouse is limited to the unused exclusion of the last such deceased spouse.  Remember that life insurance is income tax free to the recipients, but the death benefit is still taxable for estate tax purposes in your estate, unless you properly place the insurance into an Irrevocable Life Insurance Trust (“ILIT”) or consider additional planning to address taxes on the excess. There is still a three year waiting period after you transfer your existing insurance into an ILIT before it is out of your taxable estate.  New insurance properly structured under which the ILIT is the applicant, owner and beneficiary is out of the taxable estate without having to wait for three years. The estate tax laws are subject to change, and while there are currently no further fiscal cliffs, sequesters, or pending legislation that would reduce the exemption or change portability, both tax and nontax issues must still be considered. If you have any questions about taxes or other issues, please feel free to give us a call or schedule a meeting. It will be our pleasure to help you!

We periodically contact our clients to apprise them of certain issues that may impact them.  Estate planning and tax issues are most commonly addressed, but an integral part of estate planning that doesn’t receive as much attention is family business succession planning.


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