E S T A T E P L A N N I N G
Seize opportunities while they’re available
Now that estate, gift and generation-skipping transfer (GST) tax exemptions and rates no longer are scheduled to expire, estate planning may be a little easier. Plus, because the exemptions are at record-high levels, far fewer taxpayers need to worry about being subject to these taxes. But Congress could still pass legislation at any time making estate tax law changes — and not necessarily for the better. So whether or not you’d be subject to estate taxes under the current exemptions, it’s a good idea to consider whether you can seize opportunities to potentially lock in tax savings today. Those same opportunities might not be available in the future.
Estate tax
The estate tax rate is currently 40%, and it’s scheduled to remain at that level. The estate tax exemption increased to $5.34 million for 2014 and it will continue to be adjusted annually for inflation.
To avoid unintended consequences, review your estate plan in light of the changing exemption. A review will allow you to make the most of available exemptions and ensure your assets will be distributed according to your wishes.
Gift tax
The gift tax continues to follow the estate tax exemption and rates. Any gift tax exemption used during life reduces the estate tax exemption available at death.
You can exclude certain gifts of up to $14,000 per recipient each year ($28,000 per recipient if your spouse elects to split the gift with you or you’re giving community property) without depleting any of your gift tax exemption. This is the same as the 2013 amount. (The exclusion is adjusted for inflation annually, but it increases only in $1,000 increments, so it typically goes up only every few years.)
Warning: You need to use your 2014 exclusion by Dec. 31. The exclusion doesn’t carry over from year to year. For example, if you don’t make an annual exclusion gift to your granddaughter this year, you can’t add $14,000 to your 2015 exclusion to make a $28,000 tax-free gift to her next year. (Case Study V shows just how powerful the annual exclusion can be.)
GST tax
The GST tax generally applies to transfers (both during life and at death) made to people more than one generation below you, such as your grandchildren. This is in addition to any gift or estate tax due. The GST tax continues to follow the estate tax exemption and rate.
The GST tax exemption can be a valuable tax-saving tool for taxpayers with large estates whose children also have — or may eventually have — large estates. With proper planning, they can use the exemption to make transfers to grandchildren and avoid any tax at their children’s generation.
State taxes
A federal estate tax deduction is available for state estate taxes paid. Keep in mind that some states impose estate tax at a lower threshold than the federal government does.
To avoid unexpected tax liability or other unintended consequences, it’s critical to consider state law. Consult a tax advisor with expertise on your particular state.
Exemption portability
If one spouse dies and part (or all) of his or her estate tax exemption is unused at his or her death, the estate can elect to permit the surviving spouse to use the deceased spouse’s remaining estate tax exemption. Warning: Portability is available only for the most recently deceased spouse. It doesn’t apply to the GST tax exemption and isn’t recognized by some states. And it must be elected on an estate tax return for the deceased spouse — even if no tax is due.
The portability election will provide flexibility if proper planning hasn’t been done before the first spouse’s death. But portability doesn’t protect future growth on assets from estate tax like applying the exemption to a credit shelter trust does. Trusts offer other benefits as well, such as creditor protection, remarriage protection, GST tax planning and state estate tax benefits.
So married couples should still consider marital and credit shelter trusts — and transferring assets to each other to the extent necessary to fully fund them at the first death. Transfers to a spouse (during life or at death) are tax-free under the marital deduction, assuming he or she is a U.S. citizen.
Tax-smart giving
Giving away assets now will help reduce the size of your taxable estate. Here are some strategies for tax-smart giving:
Choose gifts wisely.
Consider both estate and income tax consequences and the economic aspects of any gifts you’d like to make:
* To minimize estate tax, gift property with the greatest future appreciation potential.
* To minimize your beneficiary’s income tax, gift property that hasn’t already appreciated significantly since you’ve owned it.
* To minimize your own income tax, don’t gift property that’s declined in value. Instead, consider selling the property so you can take the tax loss and then gifting the sale proceeds.
Plan gifts to grandchildren carefully.
Annual exclusion gifts are generally exempt from the GST tax, so they also help you preserve your GST tax exemption for other transfers. For gifts to a grandchild that don’t qualify for the exclusion to be tax-free, you generally must apply both your GST tax exemption and your gift tax exemption.
Gift interests in your business.
If you own a business, you can leverage your gift tax exclusions and exemption by gifting ownership interests, which may be eligible for valuation discounts. So, for example, if the discounts total 30%, in 2014 you can gift an ownership interest equal to as much as $20,000 tax-free because the discounted value doesn’t exceed the $14,000 annual exclusion. Warning: The IRS may challenge the calculation; a professional, independent valuation is recommended.
Gift FLP interests.
Another way to potentially benefit from valuation discounts is to set up a family limited partnership. You fund the FLP and then gift limited partnership interests. Warning: The IRS scrutinizes FLPs, so be sure to properly set up and operate yours.
Pay tuition and medical expenses.
You may pay these expenses without the payment being treated as a taxable gift to the student or patient, as long as the payment is made directly to the provider.
Make gifts to charity.
Donations to qualified charities aren’t subject to gift tax and may provide an income tax deduction.
Trusts
Trusts can provide significant tax savings while preserving some control over what happens to the transferred assets. You may want to consider these:
* A credit shelter (or bypass) trust helps married couples minimize estate tax and provides additional benefits. A qualified terminable interest property (QTIP) trust can benefit first a surviving spouse and then children from a prior marriage.
* A qualified personal residence trust (QPRT) allows you to give your home to your children today — removing it from your taxable estate at a reduced tax cost (provided you survive the trust’s term) — while you retain the right to live in it for a certain period.
* A grantor-retained annuity trust (GRAT) works similarly to a QPRT but allows you to transfer other assets; you receive payments from the trust for a certain period.
Finally, a GST — or “dynasty” — trust can help you leverage both your gift and GST tax exemptions, and it can be an excellent way to potentially lock in the currently high exemptions while removing future appreciation from your estate.
Insurance
Along with protecting your family’s financial future, life insurance can be used to pay estate taxes, equalize assets passing to children who aren’t involved in a family business, or pass leveraged funds to heirs free of estate tax. Proceeds are generally income-tax-free to the beneficiary. And with proper planning, you can ensure proceeds are excluded from your taxable estate.
Why annual exclusion gifts can be a powerful tax-saver
CASE STUDY V
In 2014, Omesh and Annie combine their $14,000 annual exclusions so that their three children and their children’s spouses, along with their six grandchildren, each receive $28,000. The result is that $336,000 is removed from the couple’s estates free of taxes.
If the same amounts were transferred to the recipients upon Omesh’s or Annie’s death instead — and no estate or GST tax exemption was available — the tax hit, at the current 40% rate, would be $134,400 in federal estate taxes and $67,200 in GST taxes. So the annual exclusion gifts could potentially save the family $201,600 in taxes. If they maximize their annual exclusion gifts each year, just think about how much tax they could save!
For the next several weeks, join us in educating you to the world of Tax Planning, 2014, but please , contact your tax advisor to learn exactly which strategies can benefit you the most.
Chapter 2 INCOME & DEDUCTIONS
Chapter 3 FAMILY & EDUCATION
Chapter 4 INVESTING
Chapter 5 BUSINESS
Chapter 6 RETIREMENT
Chapter 7 ESTATE PLANNING (you are reading)
Chapter 8 TAX RATES
Wanna Start from The Beginning? Go to our “Personal Finance ” Section and start at Chapter 1.
Anthony Rivieccio is the founder & The CEO of The Financial Advisors Group, celebrating their 18th year as a fee only financial planning firm specializing in solving one’s financial problems. Anthony has been a recognized financial expert since 1986. He has been seen, heard or read by many national and local media outlets including: Klipingers Personal Finance Magazine, The New York Post, News12 The Bronx, Bloomberg News Radio, Bronxnet Channel 67 TV, The Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS1010 Radio, The Bronx News newspaper and The Bronx Chronicle. Anthony can be reached at 347.575.5045
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