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Modest estates: New tax planning considerations

The landscape has changed for estate planning in the past several years since the gift and estate tax was set at 40% and the lifetime exemption was upped to $5,450,000 in 2016.

Now many modest estates will have either no estate tax or a very nominal estate tax, therefore, practitioners were focused on;
-Reducing the estate tax for inter vivos gifting, and
-Affecting fractional interest discounts

Now, with the higher exemption, practitioners are focusing on the exact opposite – keeping the assets in the estate.

Income tax is a major consideration now

When assets are gifted, their tax basis carries over to the beneficiary. When appreciated assets are gifted, their corresponding future income tax liability is also passed on to the beneficiary.

With the increase in income tax rates, this burden has become more significant, especially in light of increasing property values and market values of businesses. Coupled with the increased lifetime gift and state tax exemption and lower gift and estate tax returns, one must consider wither inter vivos gifting is still beneficial in the long run.

It’s all about basis, basis, basis

Practitioners are now focusing on the income tax basis of assets. If gifting assets is appropriate, practitioners are zeroing in on high-basis assets and preserving the “step-up” upon death for the low-basis asset

Also, if irrevocable trusts have already been established with low-basis assets, practitioners are looking to the trust agreement see whether an asset –swapping feature is available, and they are swapping high-basis assets for low-basis assets to maximize the step-up without having to use any remaining lifetime exemption. Of course, long-term appreciation should still be considered before making these transfers.

Trusts were popular for modest estates since they might represent a large portion of the owner’s estate. With the increased exemption, the owner’s estate might now be under the $ 5.450,000 exemption amount if the residence were included in the estate. A modest estate may welcome such inclusion to get the basis step-up.

Jointly held property with right of survivorship will subject the whole property to inclusions in the decedent’s estate, even though the decedent may own only a portion of the property (IRC2040). In the past, many individuals avoided this type of ownership with non-spouses. However, individuals with modest estate may want to revisit how they own property to allow for a greater step-up in basis for the nonspouses.

Are credit shelter trusts extinct?

In addition to the 40% rate and $ 5,450,000 exemption, Congress also established the concept of portability in 2010. Under portability, if a decedent’s estate is under the $5.450,000 exemption (for 2016), the unused portion can be used by the estate of the decedent’s surviving spouse.

Prior to the law change, couples had to implement a two-trust estate plan to take advantage of each spouse’s applicable exclusion amount:

1. A credit shelter trust to use the exclusion amount, and
2. A marital trust to qualify for the marital deduction

When the surviving spouse dies, only assets in the marital trust would be included in the estate.
The assets in the credit shelter trust would not be includable, even if they grew well beyond the applicable exemption amount.

With the estate tax changes, modest estates seem to be in an upside-down world. The old mantra of “get it out of the estate while you’re still alive” may not make sense any more as the new mantra of “get that basis step-up” is being ushered in. Practitioners are now looking at unwinding the old strategies that made sense then, but do not make sense now.


Tarta Law Firm NJSteven W. Tarta, Esq. brings more than 45 years of professional experience to his practice, with a sophisticated focus on Estate Tax Planning, Living Trusts and Elder Law.

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