2014 Estate And Tax Planning

With the recent expansion of Blank Rome's Los Angeles office and the addition of a San Francisco office, the Private Client Group has planted its flag on the West Coast. On February 1, 2014, William Finestone joined our group in Los Angeles. Bill is a member of the American College of Trust and Estate Counsel ("ACTEC"), is included in "Best Lawyers in America," and has been recognized as a "Southern California Super Lawyer" by Los Angeles Magazine. With the addition of Bill, members of our group are admitted to practice in California, New York, Connecticut, Pennsylvania, New Jersey, Florida, Virginia, the District of Columbia, and Maryland.

This estate and tax planning newsletter discusses certain concepts and techniques that we hope may be of interest to our clients and friends.

Transfer Tax Changes. The American Taxpayer Relief Act of 2012 (the "2012 Act," passed in 2013) made permanent the major changes made in 2010 in the law regarding gift, estate, and generation-skipping transfer ("GST") taxes (collectively, "transfer taxes"). Gift Tax. The tax-free "annual exclusion" amount remains $14,000 per donee in 2014. The cumulative lifetime exemption increased from $5,250,000 in 2013 to $5,340,000 in 2014 (inflation adjustment). The tax rate on gifts in excess of $5,340,000 remains at 40%. Estate Tax. The estate tax exemption (reduced by certain lifetime gifts) also increased from $5,250,000 in 2013 to $5,340,000 in 2014, and the estate tax rate on the excess value of an estate also remains at 40%. All of a decedent's assets (other than "income in respect of a decedent," such as IRAs and retirement plan benefits), as well as a surviving spouse's half of any community property assets, will have an income tax basis equal to the fair market value of those assets at the date of death ["stepped-up (or down) basis"]. In this regard, securities brokers still are required to retain basis records and report the income tax basis of securities to the IRS. Accordingly, be sure to advise your broker of your basis in securities received by gift or inheritance. GST Tax. For 2014, the GST tax rate also remains at 40% and the lifetime exemption also has increased (inflation adjustment) from $5,250,000 in 2013 to $5,340,000 in 2014. Paragraph 5 includes more information about the GST tax. Portability of Estate Tax Exemption. The 2012 Act also made permanent the temporary "portability" rules introduced in 2010 that provide for the transfer of a deceased spouse's unused estate tax exemption ("deceased spousal unused exclusion amount" or "DSUEA") to a surviving spouse (without inflation adjustments). Thus, if a 2014 decedent's taxable estate is less than $5,340,000, the DSUEA can be used by the surviving spouse with respect to both gift taxes and estate taxes (but not GST taxes). Portability is not available if either spouse is a nonresident alien. Portability may allow some couples to forgo a more complex estate plan while still taking advantage of both spouses' transfer tax exemptions. Portability must be irrevocably elected on a timely filed (including extensions) estate tax return, even if a return is not otherwise required to be filed. A typical estate plan for a married couple generally has provided for the establishment of several trusts at the death of the first spouse: An "Exemption (or "Bypass" or "Credit Shelter") Trust"; a "Marital Trust," in California where joint trusts are common, a "Survivor's Trust," and possibly a "Generation Skipping Tax Exempt Trust." One of the reasons for the Exemption Trust is to use the deceased spouse's estate tax exemption to the fullest extent possible. Under the new portability law, however, if one spouse dies and leaves assets to persons (other than the surviving spouse and charity) in an aggregate amount less than the basic exclusion amount ($5,340,000 in 2014), the surviving spouse may be able to use the DSUEA as well as the surviving spouse's own exemption. This portability provision may eliminate the need to create an "Exemption Trust" at the first spouse's death. For example, if this year the first spouse to die leaves all of his or her assets to the surviving spouse, no part of the deceased spouse's exemption is used because of the marital deduction available for assets passing to a surviving spouse at the first spouse's death. Unless the surviving spouse remarries and survives his or her new spouse, he or she will have an aggregate exemption of (i) $5,340,000 ("DSUEA") and (ii) his or her own inflation-adjusted $5,340,000 exemption ($10,680,000 total in 2014). Similarly, if in 2014 the first spouse to die leaves $1,000,000 to his or her children, the surviving spouse will have an aggregate exemption of $9,680,000 (the remaining $4,340,000 "DSUEA" in addition to his or her own inflation-adjusted $5,340,000 exemption). In many cases, however, we will advise our clients to continue to use an Exemption Trust as part of their estate plans for both tax and non-tax reasons. State tax considerations may also impact the use of Exemption Trusts. Federal tax reasons include the following: (i) The DSUEA is not indexed for inflation; (ii) eliminating estate tax on any appreciation of Exemption Trust assets at the surviving spouse's death, regardless of the value of the surviving spouse's assets; (iii) allowing for an allocation of the deceased spouse's GST exemption to the Exemption Trust;* (iv) the surviving spouse could remarry, survive his or her second spouse and be limited to using the unused exemption of his or her second predeceased spouse if any (a DSUEA thus may inhibit remarriage); and (v) an estate tax return must be filed timely to qualify for portability. Non-tax reasons include the following: (i) Limiting (or eliminating) the ability of the surviving spouse to direct the disposition of the deceased spouse's assets on the surviving spouse's death; (ii) restricting the...