Conference Call: “Top 10 Signposts to Guide Planning for Estates under $10MM”

The American Taxpayer Relief Act of 2012 (ATRA) delivered transfer tax certainty, large indexed transfer tax exemptions, and portability. Taking into account new norms, McManus & Associates, an estate planning law firm based in the Tri-State Area, today released a new installment in its free Educational Focus Series, “Top 10 Signposts to Guide Planning for Estates under $10MM.” During a conference call for clients, the firm’s Founding Principal and top AV-rated Attorney John O. McManus shed light on estate planning strategies that should be considered today following recent changes to federal and state laws.

LISTEN HERE: “Top 10 Signposts to Guide Planning for Estates under $10MM”

“Trusts may be significantly impacted by permanency and scheduled increases for inflation of the federal exemption amounts for gift tax, estate tax and generation skipping tax; income tax changes; and especially the new 3.8 percent surtax,” explained McManus. “A growing number of Americans with increasing net worths are discovering that their estates may be subject to unexpected taxation once they die.”

McManus added, “For couples that own highly appreciated assets, avoiding taxes can be a matter of paramount importance to be able to leave as much as possible to heirs. Couples that don’t have millions tied up in their home or finances should also be aware of these estate tax rules, because tax laws are subject to frequent changes, and couples could lose the tax shelter they enjoy under the current limit.”

Top 10 Signposts to Guide Planning for Estates under $10MM

1.         The increased Federal exemption has created a new paradigm in estate planning. Why must equal emphasis now be given to capital gains tax planning?

a.         Estate planning has become inextricably intertwined with income tax planning.

b.         Income tax planning can minimize current income taxes and maximize basis step up upon death.

c.         Step up in income tax basis in many instances will have a greater tax benefit than state estate tax savings.

d.         Many clients have greatly appreciated stock, and the gains tax if sold in the trust can be a significant amount. With the higher exemption amount, it might make sense to leave low basis assets in one’s estate to achieve step up.

2.         What are the opportunities to achieve a step up in basis after planning is complete?

a.         Swapping into the trust high basis assets or cash for low basis assets can help to achieve the desired step up in basis at the grantor’s death.

b.         The trust could also hold a note for assets moved back into the grantor’s estate to achieve the same step up in basis.

3.         If gifted assets have greatly appreciated, can heirs cover the gains tax due?

a.         Life insurance can be utilized as a strategy for those who have gifted assets that will not receive a step up in basis to help pay for the capital gains tax or as an alternative to gifting appreciating assets.

b.         Again, this may be time to consider swapping trust assets in order to achieve a step up.

c.         Vacation homes, family retreats, art or other items that will most likely stay in the family ownership for generations may be better assets to keep in trust, since there is less worry about paying any gains tax since a sale is unlikely.

4.         What are the consequences and income tax benefits of planning testamentary trusts for the benefit of the surviving spouse as grantor trusts?

a.         A trust jumps to the highest levels of taxation for gains and income tax at much lower thresholds than for individuals.

b.         A grantor trust can be set up to potentially pay lower rates of taxation with a trust established for a surviving spouse for which distributions are not mandatory.The income earned on the trust will be picked up on the surviving spouse’s personal filing.

5.         Can Joint Exempt Step-up Trusts (JESTs) be used to ensure a full step up in basis for jointly owned property first?

a.         This allows a full step up in basis of all assets in the trust (as opposed to the 50% in normal cases).

b.         A JEST is used in non-community property states. A husband, for example, could create the trust and reserve the power to amend, revoke, or terminate it. The wife could be the beneficiary of the trust, and all trust property is paid to her estate upon death.

c.         There have been two recent private letter rulings in favor of this strategy, but it is in its nascent stages.

6.         Will one under the federal exemption still owe estate tax to his or her state government?

a.         Although married couples are currently allowed a federal exemption of just over $10MM in estate taxes, the exemption amounts at the state level are much lower (e.g., $675,000 in New Jersey, $1MM in New York and $2MM in Connecticut).

b.         Although with the Federal exemption amount a married couple can elect portability to deploy both spouses’ exemption amounts on the passing of the second spouse, there is not such an option for that on the state level.

c.         A credit shelter trust preserves both spouses’ state exemption amounts by funding first the exemption trust with assets up to the limit.

7.         Gifting “gap-QTIP” (or Qualified Terminable Interest Property) interest income – how can unused exemption amounts be uniquely leveraged? Why sprinkle distributions among other beneficiaries?

a.         For the amount of the gap between the state exemption amount and the federal exemption amount, one should consider the gift of a gap-QTIP trust.

b.         Income interest for the QTIP should be given to the trust for the children. This will leverage the first spouse’s Deceased Spousal Unused Exclusion (DSUE) and avoid inclusion in the surviving spouse’s estate.

c.         The surviving spouse should not be named Trustee of the gap QTIP trust but can use the principal, since only the owner of the income interest is considered owner for IRS purposes.

d.         The exercise by the spouse of a general power of appointment will accomplish the same tax results.

8.         Which non-tax factors should be considered for estate planning with trusts?

a.         Be sure to consider trust-planning elements of asset protection, business succession, charitable giving, special needs, foreign property and citizenship when deciding if simple wills will suffice for your estate plan.

b.         If there may be adverse parties as beneficiaries of a trust, consider use of an institutional trustee.

c.         Name an advisor or trusted friend to have administrative power over the investment of assets in trust.

d.         If a family business shares are held in trust and all trust beneficiaries are not involved in running the business, consider life insurance to “square up” with children not involved in the business.

9.         How can one fulfill the annual requirements for upkeep of his or her estate plan and monitor issues regularly?

a.         Hold annual review meetings.

i.          Review subscription agreements for limited partners and consider adding new partners to a Family Limited Partnership.

ii.         For those on the cusp of federal taxation, monitor net worth growth.

iii.        Consider annual exclusion gifts, Grantor Retained Annuity Trusts (GRATs), and Lifetime Credit Shelter Trust (LCSTs), too.

iv.        Borrow (i.e. from a line of credit) in order to make gifts when there are few available high basis assets.

v.         Exercise powers of substitution to swap low basis for high basis assets (line of credit may be used in this approach, as well).

vi.        Discuss assets currently owned by the trust(s).

10.       Should one plan for digital assets?

a.         Digital assets have value, sometimes sentimental and sometimes commercial. Consider who will get the digital trading accounts, websites owned and/or registered to the deceased.

b.         Designate beneficiaries online. There are ways companies like Google have to alert them to online silence; they will scan for traces of one’s online footprint. If Google believes you to have passed away, the company can notify one’s beneficiaries named in their servers and provide links for them to can download the photographs, videos, documents or other data left to them.

c.         There are many online services offering safe deposit boxes for safeguarding the passwords to e-mail accounts and other data.

d.         Make a private list of all usernames and passwords for all the accounts in which one has a digital presence, and make sure to update the list if the log-in information changes. Perhaps mail them to one’s estate attorney in a sealed envelope.

“Just like a Rubik’s Cube, estate planning is a combination puzzle,” commented McManus. “McManus & Associates is committed to helping you solve your wealth management challenges that evolve with ever-changing laws at the federal and state levels.”