Taxation Blog

Higher Estate Tax Exemption Changes Focus to Income Tax Planning

By: Ronald L. Siegel

After more than a decade of uncertainty, we now have a clear picture of the Federal Estate and Gift Tax Exemption.

The exemption amount, which is adjusted annually for inflation, is Five Million Three Hundred and Forty Thousand Dollar ($5,340,000.00) for an estate of a person who passes away in 2014.  For a married couple, that amount doubles to Ten Million Six Hundred and Eighty Thousand Dollars ($10,680,000.00).

Also made a permanent part of the tax code is the concept of “portability”.  Portability allows a surviving spouse to elect to utilize the exemption of a predeceased spouse which would otherwise have gone wasted.

The traditional estate planning approach of dividing the assets between the spouses and creating “Credit Shelter Trusts” or “A-B” Trusts, although still appropriate in many cases, is quite often no longer necessary for families whose combined net worth is significantly below the estate tax exemption amount.

Accordingly, if you have not reviewed your estate plan in light of the new tax law changes, you should do so.

One of the primary reasons for doing so deals with income tax and the basis in inherited assets.  Basis determines the amount of gain or loss paid on the disposition of assets.  For a living person it is typically the cost of the asset (known as cost basis).  When a person dies, with few exceptions, the basis of all of his or her assets is adjusted to the date of death value, even though there may have been substantial appreciation in those assets.  The typical “Credit Shelter Trust” referenced above would achieve that basis step up at the first spouse’s death, but not at the second.  Because estate tax is no longer an issue for 99% of Americans, consideration should be given to modifying or eliminating the “Credit Shelter Trust” in such a way as to allow a second basis step up for the second spouse’s death.

This can be accomplished by inserting a power of appointment in a trust, or by other techniques, such as joint ownership or outright bequest.

There is no universal method that works for everyone – what’s best depends on your individual circumstances.

Ronald L. Siegel is a Florida Bar Board Certified specialist in Wills, Trusts and Estates. He focuses his practice in all aspects of estate planning, probate, trust administration, guardianship and real estate.