Portability | Begin the Begin

2017 Estate and Gift Tax Exemptions

November 3, 2016

money-2 The IRS recently announced the estate and gift exemption levels for 2017 and they continue to increase as per legislation passed in January 2013. The applicable exclusion amount from Federal estate tax will increase to $5.49 million per person allowing a married couple to shelter $10.98 million from Federal estate tax, the rate for which is currently set at 40%. The lifetime exemption from gift tax remains coupled with the exemption from Federal estate tax, and therefore, this exemption will also increase to $5.49 million per person. The annual gift exclusion amount will remain at $14,000 per person. Virginia continues to not impose a state level estate tax. Maryland’s exemption from estate tax will increase to $3 million while the District of Columbia’s exemption will remain at $1 million until certain revenue surplus targets are met, which may not be until 2018, at which point the exemption will increase to $2 million. As a reminder, proposed regulations issued in August will significantly reduce the availability of valuation discounting on certain transfers of interests held in closely held or family owned businesses, and therefore, taking advantage of 2016 exemption levels is critical for some individuals, business owners and families.

For seniors and those with disabilities, a cost-of-living adjustment (COLA) for Social Security and Social Security Income (“SSI”) will increase monthly benefits by 0.3%. In addition, the cap on the amount of earnings subject to payroll tax will increase to $127,200. Finally, the tax brackets, standard deductions, Pease and PEP limitations, kiddie tax and other credit and deduction levels for 2017 were announced. #estateplanning #estatetax #gifttax #annualgift #exemptionlimits #COLA2017 @bgnthebgn

ALERT – UPDATE: New Rules for Basis Consistency

March 6, 2016

I previously posted about the new rules for basis consistency about which executors and their advisors must be aware. I noted that the IRS had indicated that regulations would be forthcoming. Late last week the proposed regulations were released relating to both Section 1014(f) and Section 6035 and I have highlighted a few points below.

One of the biggest issues about which clarity was being sought was whether an executor of an estate in which an estate tax return is being filed to take advantage of portability needs to complete and file Form 8971. The proposed regulations exclude such returns from the requirement; that is, if an executor is simply filing for portability, then Form 8971 is not required.

For those who are required to file an estate tax return, the regulations provide some additional guidance as to how an executor is to go about satisfying this new requirement. For example, if at the time the Form is due, the executor does not yet know what assets a beneficiary will receive, then the executor must report all assets the beneficiary may receive. This ultimately means that the same assets may be reported to several different beneficiaries. This also means that an executor will be required to supplement the initial filing of Form 8971 and make it clear to the beneficiaries which filings are the final ones.

Moreover, it now appears that when a beneficiary who originally received an asset from an estate subsequently transfers that asset to another family member or entity, the transferring beneficiary will also be required to file Form 8971 with the IRS and report the basis to the family member or entity. This requirement impacts many individuals who otherwise had no reporting requirement to the IRS and may not be paying attention to the fact they now have these requirements.

Lastly, the new rules, as clarified by the regulations, do not allow for a step-up in basis (a discussion from an earlier post) in certain circumstances. After discovered assets that should have been disclosed on the estate tax return and were initially not, will have a zero basis, and therefore, be subject to greater income taxes consequences when sold unless certain corrective measures are taken.

What these new rules and proposed regulations tell us is that if you are dealing with a taxable estate, then you should consult with your professional advisor about various filing requirements to avoid missing a filing and incurring the resulting penalties. #estateadministration #basisconsistency #form8971 #IRSregulations #taxplanning #estatetax

Why Has Income Tax Planning Become a Bigger Part of Estate Planning?

February 17, 2016

Many of you may have had your estate plan prepared at a time when the exemptions from Federal estate tax were much lower and the ability to use a deceased spouse’s exemption was unavailable. To ensure that a married couple maximized the use of the available exemptions, your estate plan may have been structured so that upon the death of one spouse, two subtrusts were automatically created for the benefit of the surviving spouse.

As discussed in an earlier post, the estate tax laws have changed and exemptions from Federal estate tax were permanently set at higher levels. In addition, married couples are permitted to transfer any unused Federal estate tax exemption to a surviving spouse by way of a concept known as ‘portability.’ Thus, the need for an automatic allocation between two subtrusts upon the death of one spouse is no longer necessary in certain circumstances and may have unintended income tax consequences as follows.

As you may know, upon the death of one spouse, the tax basis in certain assets owned by that spouse is adjusted to the fair market value as of the date of death. This adjustment is often referred to as a “step-up” or “step-down” in basis. Assets funded into the subtrusts will receive a basis adjustment on the death of the first spouse. Upon the death of the surviving spouse, only assets held in one of the subtrusts (i.e., the Marital Trust) will be adjusted to the fair market value as of the date of death of the surviving spouse. The assets of the other subtrust (i.e., Credit Shelter or Bypass Trust) continue with the same tax basis that was received upon the death of the first spouse. Therefore, the beneficiaries under your estate plan after both of you are gone may pay more in capital gains tax on any assets held in the subtrusts if automatic allocation is made between the subtrusts and the assets appreciate in value after the date of death of the first spouse.

To provide maximum flexibility to the family following the death of the first spouse, you should consider amending your estate plan to remove the automatic allocation and having all the assets pass to one subtrust. The surviving spouse would then have the ability to reallocate (i.e., disclaim) a portion of the assets, if necessary, but the reallocation would be made after evaluating both the income tax and estate tax situation at that time.

Realizing this may be a lot to digest, the main point is that if you have not recently reviewed your estate plan, you should do so to see if any changes need to be made. Rest assured that any change would be implemented only after collaboration and concurrence of all of your advisors (i.e., your financial advisors, your accountant and your attorney). #estateplanning #taxplanning #incometaxplanning #portability #estateplanupdate