► Federal and California Laws and Regulations: Congress enacted the American Taxpayer Relief Act of 2012, known as ATRA. While estate tax planning is only one aspect of the estate planning process, the permanence of the new law provides a welcome contrast to uncertainty about exemption amounts and rates that the last 10 years provided.
The new legislation makes permanent the $5 million “applicable exclusion amount” – that is, each person’s gift and estate tax “exemption” – and sets the generation-skipping transfer (GST) tax exemption at the same amount. The estate, gift and GST taxes are all indexed for inflation going back to 2011, so the starting point for each in 2013 will actually be $5.25 million. This amount will continue to increase periodically in relatively small increments based on the rate of inflation. The estate tax rate on taxable estates over $5.25 million has been increased from 35 percent to 40 percent.
The concept of “portability,” as introduced in 2010 legislation, continues. This means that if the estate of the first person of a couple to die is not large enough to fully utilize his or her applicable exclusion amount, then the unused portion is shifted to the surviving spouse. For example, if the husband dies first with $3 million of assets, the $2.25 million of his applicable exclusion amount that was not needed to shelter his assets from tax may be transferred to the wife, giving her an applicable exclusion amount of $7.5 million. In other words, each couple is permitted to shelter as much as $10.5 million-plus from estate tax, regardless of which spouse dies first or how the couple’s assets are titled.
► These rules vastly simplify gift and estate tax planning for couples, and will alleviate the transfer tax concerns of most single people, as well. More particularly:
- Unification of gift and estate tax: The $5.25 million “applicable exclusion amount” can be given during lifetime, and if not used then, is available upon death.
- Simplified planning for married couples: If a couple is confident they will never have more than $10.5 million of combined wealth and it is extremely unlikely that the combined estates will ever exceed that figure, they need not do any estate tax planning. From a gift and estate tax standpoint, the couple could own all of their assets jointly with no disadvantage.
However, a single joint trust or separate trusts (created at the first death) might still be advisable to avoid probate proceedings, to provide a receptacle for gifts to children, to obtain a step up in basis, for asset protection, or to impose some limits on the surviving spouse’s right to dispose of all of the couple’s wealth as he or she sees fit.
- Making things easier for the surviving spouse: A couple with less than $10.5 million of combined wealth and no concerns about the surviving spouse’s control of their wealth can make things much simpler for the surviving spouse by converting separate trusts to a single joint trust that would serve only as a probate avoidance device and would eliminate the need for separate accountings, additional tax returns, etc., after the death of the first spouse.
- For couples who desire more control: If each spouse wants to control disposition of his or her assets when the surviving spouse dies — that is, to assure that the assets pass to the decedent’s children and not to the surviving spouse’s children from a prior marriage or the surviving spouse’s next husband or wife — it will still be necessary to have separate trusts and to identify which assets belong to which spouse.
- Simplifying or Unwinding Prior Planning: Planning for some clients will be simpler and less costly. We can help you evaluate what, if anything, can be done with existing trust(s), insurance plans, and so forth. Many of your existing planning vehicles may be reapplied in new ways to accomplish important current goals even if your tax goals have changed. These might include the following: income tax planning, wealth preservation, “asset protection”, management, and more. If some of your existing trust(s) or entities can be simplified, or even eliminated, there could be annual savings in tax preparation, management and other costs. We can help you determine which, if any, steps are advisable.
► Review all estate planning documents including your Revocable Family Trust and Pour-Over Wills. Your existing estate planning documents should be reviewed now that the law is set to determine what revisions are necessary. The formulas used to govern distributions and bequests under your documents may need to be updated to reflect the new law and other changes. The tax allocation clause should be reviewed in light of the new law, potential large lifetime gift transfers you might make, and other developments.
► Health Care Power of Attorney. All Health Care Power of Attorneys should include HIPAA language and you might need to update your choice of Attorney(s)-in-Fact.
► Life Insurance: If you maintain life insurance, how does your existing insurance coverage fit your current needs and the current and possible future law? Perhaps you might wish to lower coverage to save costs if you are confident that the full coverage is unnecessary because the estate and GST exemptions have been substantially increased. However, as mentioned above, the full estate and GST tax rates returned this year. Therefore, while it may be appropriate to consider the level of life insurance coverage and the manner in which it is owned and administered, the temporary lifting of the exemptions and lowering of rates suggest that action be taken only with the guidance of a qualified professional.
► No Contest Clause. This clause provides for the enforceability of how you have divided your family assets. All clauses need to be modified to conform to recent changes in California Statutory and Case Law.
► Qualified Retirement Plan (ERISA) Regulations. Regulations change every year. Many of the changes have been with IRAs and Roth IRAs. If you have an IRA, it is imperative that you review your Beneficiary Forms. You should check the beneficiary forms on file for your individual retirement accounts and life insurance policies. Make sure the forms in your files are consistent with those in the financial company’s’ files. If your spouse is the beneficiary of your IRA or 401(k), you might want to consider naming your children as contingent beneficiaries. By taking this step, if your spouse dies before you, your children will be able to roll the money into an “inherited IRA” and stretch out distributions and tax deferral over their lifetimes.
► Changes in Family Circumstances and Finances:
- Alternative provisions may be added allowing for gifts of selected assets, a List or Memorandum, to selected family members or friends.
- A review of the ages and percentages of distribution to children or other beneficiaries;
- A review of the successor trustee(s);
- The current financial markets and specifically the reduction in real estate values afford us an excellent opportunity to make gifts to family members. We have been recommending the use of a Qualified Personal Residence Trust (QPRT) to certain clients;
- You may have refinanced your house and inadvertently taken the title out of the trust which would cause a Probate Administration of the asset.
- You may have made gifts to children that are not of equal value and may or may not want those gifts to be equalized with distributions at the time of your death.
We have only highlighted some legal changes and changes in family circumstances that may or may not pertain to you. Even in this turbulent economy, you still have control over your affairs, and we want to help you take control of them. We would welcome the opportunity to meet and discuss your estate planning and assist with any updating as we mutually determine.