Personal Planning Strategies - December 2013

2014 Estate, Gift and GST Tax Update: What This Means for Your Current Will, Revocable Trust and Estate Plan

As we previously reported, the American Taxpayer Relief Act of 2012 (the "Act") made the following permanent: (1) the reunification of the estate and gift tax regimes, (2) the $5 million estate, gift and generation-skipping transfer ("GST") tax exemptions, as increased for inflation (as discussed below), and (3) portability.

Tax Exemption Inflation Increases for 2014

In 2014, there is a $5,340,000 federal estate tax exemption (increased from $5,250,000 in 2013) and a 40% top federal estate tax rate. In 2014, there is a $5,340,000 GST tax exemption (increased from $5,250,000 in 2013) and a 40% top federal GST tax rate. In 2014, the lifetime gift tax exemption is $5,340,000 (increased from $5,250,000 in 2013) and a 40% top federal gift tax rate. In 2014, the annual gift tax exclusion is $14,000 (no increase from 2013). These increased exemptions create opportunities to make larger lifetime gifts, to leverage more assets through a variety of estate planning techniques (such as a sale to a grantor trust) and to shift income producing assets to individuals such as children or grandchildren who may be in lower income tax brackets and/or reside in states with a low income tax rate or no state income tax.

Portability

With portability, a deceased spouse's unused estate and gift tax exemption is portable and can be used by the surviving spouse. Portability is intended to prevent families from incurring gift and estate tax that could have been avoided through proper estate planning. The following is an example of portability:

Assume that Husband has $5 million of assets and Wife has $2 million of assets and that portability is not part of the law. Husband dies in 2012 leaving his entire $5 million to his Wife. Even though Husband has an estate of $5 million and a federal estate tax exemption of $5 million (for all purposes of this example, the exemption is not adjusted for inflation), his federal estate tax exemption is wasted because property passing to Wife qualifies for the unlimited federal estate tax marital deduction, and the marital deduction is applied before applying the federal estate tax exemption. Now suppose that Wife dies in 2014, the $5 million that she inherited from Husband had appreciated to $8 million, and her own $2 million remained the same value. Her total estate at her death is now $10 million. Applying her $5 million federal estate tax exemption, the remaining $5 million of her estate would be subject to federal estate tax at 40%, resulting in a tax of $2 million.

Now assume that portability applies upon Husband's death. Because Husband has $5 million of unused estate tax exemption, this can be passed to Wife for her use. Now, upon Wife's death in 2014, she has her own $5 million of federal estate tax exemption as well as the $5 million of federal estate tax exemption that she inherited from Husband, for a total federal estate tax exemption of $10 million. Since her estate is $10 million, her Estate can apply her entire $10 million federal estate tax exemption to insulate her entire estate from federal estate taxes. Thus, portability saves the heirs $2 million in federal estate taxes.

How do these changes affect your existing Proskauer estate planning documents?

Our estate planning documents are drafted to be flexible and, in general, their overall structure remains unaffected by the increased exemption amounts.

There may be instances where you will want to update your documents to reflect changes made by the Act, including the availability of portability. Additionally, if you are a married couple and live in a state with a state estate tax (mostly states in the northeast), there may be provisions that should be added to your documents which could save state estate taxes at the death of the first spouse.

Please do not hesitate to call us so that we can review your documents and make sure that they are up to date and reflect your current wishes.

One Year Later...

This time last year, we found ourselves in a whirlwind of advising clients to maximize transfer tax planning opportunities. We worked to ensure that clients took advantage of what many thought would be a once in a lifetime opportunity to transfer up to $5.12 million free from federal gift and generation-skipping transfer ("GST") taxes. Alas, by the time the dust settled on January 1, 2013, Congress was already hard at work passing the American Taxpayer Relief Act of 2012 ("ATRA"). ATRA made "permanent" the $5 million exemption equivalent amount for estate, gift, and GST tax purposes. This amount is adjusted for inflation in 2013 to $5.25 million and will increase to $5.34 million in 2014. Because of the 2012 dash to "use it or lose it," many clients used significant portions of their exemption in 2012 planning. So what have we been up to this year, and what do we expect for the year to come?

Cleaning Up Prior Planning

Now that there is some certainty in the transfer tax regime, one of the items we have focused on is "cleaning up" some of the lingering transactions from prior years.

Implementation and Reporting of Defined Value Gifts. Because of timing issues associated with...