2016 Estate Planning News

by Christopher D. Carico | Partner

Change in Tax Focus of Basic Estate Planning

The federal government’s recent adoption of “portability,” allowing the transfer of the deceased spouse’s estate tax exclusion to the surviving spouse, and the fixing of the maximum federal estate tax rate at 40%, has shifted the tax planning focus for estate planners from estate taxes planning to capital gains tax for couples with wealth under $11,000,000.  Those couples may now be better off with trusts that are fully includible in the surviving spouse’s estate, discarding the traditional bypass or exemption trust model and instead relying on portability to shield the assets from estate taxes.  The drawback with the bypass/exemption trust is that cost/basis of its assets remains fixed at the value established on the first death, often creating an unneeded capital gains tax problem on the sale of the asset after the second death.  The use of a marital deduction trust, in lieu of the exemption/bypass trust, can allow for a step up in cost/basis on trust assets on the second death, wiping out all capital gains taxes that would otherwise be owed on the pre-death appreciation upon a later sale.

2016 Transfer Tax Exclusions.

Because of low inflation, the inflation-adjusted lifetime transfer tax exclusion (i.e., estate and gift tax exclusion) experienced only a modest increase to $5,450,000 in 2016, up just $20,000 from 2015.  Don’t be surprised if it jumps up by closer to $100,000 in 2017 (the average increase has been $90,000 the past 5 years).  The inflation-adjusted annual gift tax exclusion remained flat at $14,000 in 2016.

Advanced Planning In Low-Interest Rate Environment

The historically-low interest rates (mid-term applicable federal rate under 2%) continue to make intra-family loans from parents to children a simple way to transfer substantial wealth, provided the borrowed funds can be re-invested by the child for returns in excess of 2%.   Consider super-charging the wealth transfer by establishing an intentionally-defective grantor trust (“IDGT”) to borrow the funds from the parents to purchase a fractional interest in the parents’ appreciated assets.  The IDGT for the children ends up with appreciated assets at substantially reduced sales prices, all future appreciation in the purchased assets escapes estate tax in the parents’ estates, the transfer is not treated as a sale that would trigger the capital gains tax and the parents pay the income tax on future trust profits, allowing the trust investments to grow undiminished by income taxes.



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