Estate planning is for all concerned with protecting and transferring assets, ensuring an efficient administration after death with the minimum of family conflict, planning for possible incapacity and health care decisions, financial security and peace of mind. An effective legal and financial plan can limit the tax liability on the assets you leave to your loved ones, lessen the heartache your family experiences by clearly setting forth your wishes, and can ensure that your heirs are properly taken care of long after your death in the manner that you so desire.
Planning must now take into consideration proposals for tax change, significantly elevated income tax rates, increasing estate tax exemptions, and obtaining the maximum step-up in income tax basis.
On the estate tax side, the exemption amount for estate, gift and generation-skipping tax (GST) purposes to $5,430,000 per person, and indexed for inflation. The top estate, gift and GST rate is 40%. It also added portability of the exclusion, providing a way to transfer the unused exclusion to the surviving spouse. The 2012 Tax Act made these changes permanent.
The introduction of portability has created the opportunity to move away from a basic testamentary estate plan that has existed for more than 30 years — i.e the creation of two shares: a credit shelter (a/k/a bypass) trust to use the exclusion of the first spouse to die, and a marital trust or share to defer any estate tax until the second death using the unlimited marital deduction. With portability, for the first time, the failure to use a credit shelter trust, or similar taxable disposition, does not waste the first estate tax exclusion.
The main advantage of portability is simplicity. It allows a married couple to establish a joint revocable trust, or similar plan, leaving all assets to the surviving spouse while preserving the deceased spouse’s exclusion amount. Another benefit of portability is that assets passing to the surviving spouse may receive another step-up in basis at the surviving spouse’s death, something that is not available for assets in a credit shelter trust. In second marriages, a two trust plan may still be advisable for non-tax reasons.
The tax focus of estate planning is now away from avoiding estate tax, and more focused on avoiding income tax. Because of the step-up in basis for appreciated assets, there may be income tax savings of allowing assets to be included in the Gross Estate (a reversal of prior planning). With estate tax often irrelevant (and Florida has no state death tax), estate planning should be more nuanced considering variables such as (1) time horizon of life expectancy (2) spending or lifestyle (3) size of the estate (4) future return of the assets (5) tax nature of the types of assets (6) expected income tax realization of the assets (7) state of residence (8) state of residence and tax rate of beneficiaries and (9) expectations of future inflation. It seems the intersection of estate planning with both income tax and financial planning has become complete.