As the year comes to a close, I encourage clients not only to reflect on the past but also to take a moment to plan for the future. As the old saying goes, the only two things that are certain are death and taxes. However uncomfortable these are, it is worth noting that with careful thought and the help of your CPA some of the discomfort can be removed.
This article is not a technically written article, as neither space nor time will allow. The objective is to encourage you to begin the conversation (both CPA and client) for these two events. When was the last time you updated or reviewed your will and trust? This is probably not high on your to-do list; however, if it has been more than five years, you should give this priority as the ESTATE EXCLUSION and GIFT TAX laws have changed and are most generous.
Since 2013, no tax is due on one’s estate or gifts up to $5.34 million per individual – if you are married, you can double that amount, which brings the tax-free estate exclusion up to almost $11 million per inflation adjusted numbers.
You should also be aware of the earlier 2011 laws that developed the concept of PORTABILITY. I refer to it as the unlimited marital deduction on steroids. If you do not have an estate greater than $5.34 million, your unused part automatically passes to your surviving spouse, so long as you timely file an estate tax return.
Now, throw in the income tax concept of STEP-UP, which is a “mark-to-market value” of an asset at the time of death. The importance of step-up is that it reduces the income taxes paid by the surviving spouse, children, or other beneficiary on the future sale of the asset by adjusting the original tax cost to fair market value at the asset title holder’s time of death. As with all tax concepts, there are exceptions and exclusions (e.g. retirement accounts or annuities).
By combining the use of the increased estate exclusion, gift tax, portability and step-up, your CPA can minimize the tax dollars paid by you and your family. Although each case is unique, here are some general planning questions to consider and discuss with your CPA:
a. If the combined joint estate is under $11 million, should we leave the estate to each other for step-up purposes (i.e., I love you wills)?
b. If my estate is under the equivalent taxable amount, should I forego making annual gifts?
c. Should I amend my wills and trusts to move away from the traditional A-B trust or are there other reasons besides estate, gift, and income taxes that I need to consider (i.e., second marriage, health issues, creditor issues, etc.)?
d. If a spouse is a bit peaked, should we shift step-up type assets into their ownership bucket? If so, are there holding period rules that would prevent death bed gifts between spouses?
e. Is it possible to have a double step-up on the values of assets (i.e., step-up to market value at my death, leave the assets to my surviving spouse, and then a step-up on the same assets at his/her death)?
f. What impact will income tax rates play at death (i.e., in 2015, the top income tax rate for a married couple kicks in for taxable income over $464,850, while the threshold for a trust is only at $12,300 – don’t forget about the additional 3.8% NIIT)?
g. What if I have set up grantor type trusts or have an existing bypass trust in operation – can I somehow distribute the assets to my surviving spouse and then step-up again at death?
As the New Year approaches, I would encourage my fellow CPAs and Attorneys to dedicate themselves to picking up the phone and discussing the issue of estate vs. income taxes and would suggest that my fellow CPAs schedule a face-to-face meeting with their client and their respective Estate Attorney – this topic is often one ignored until it is too late to plan.
Richard Bell is a licensed CPA & Attorney as serves as a expert analyst on accounting strategies specific to individuals, small business, medical professionals and the trucking industry. He is founder and president of Bell & Company. Contact him at firstname.lastname@example.org.