2014 Wolters Kluwer, CCH Whole Ball of Tax

What to Consider When Estate, Gift Tax Planning: Wolters Kluwer, CCH Looks at Recent Changes

(RIVERWOODS, ILL., January 2014) – The change of year for estate and gift tax planning was relatively uneventful, compared to the mounting uncertainty of future laws that were being debated in Congress during the “fiscal cliff” negotiations more than a year ago. However, some changes may have a significant impact on estate tax planning in 2014 and beyond. CCH, a part of Wolters Kluwer and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com) takes a look at changes and updates taxpayers should know.

ATRA Impact

With the signing of the American Taxpayer Relief Act (ATRA) into law last year, a permanent maximum estate tax rate of 40 percent was implemented. It also provides an exclusion from estate taxes of up to $5 million dollars (indexed for inflation), as well as other changes.

“Not only did the law create a new permanent top tax rate, it also made portability permanent,” said Wolters Kluwer, CCH Senior Estate Tax Analyst, Bruno Graziano, JD, MSA. “But some estate tax planning tools may offer limited opportunities in future years as the government looks to close what it considers ’tax loopholes’ while it seeks additional sources of revenue.”

Specifically, under ATRA, for 2013 onward, the maximum federal estate, gift, and generation-skipping transfer (GST) tax rate increased to 40 percent (up from 35 percent); the $5 million inflation-adjusted exclusion available since passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 remains intact; and portability, which allows a surviving spouse to use the unused portion of his or her deceased spouse’s gift and estate tax exclusion and has been available to estates since 2011, is now permanent.

Without  ATRA, the estate tax after 2012 would have returned to a maximum rate of 55 percent; with a 5-percent surtax applied to large estates (i.e., those in excess of $10 million up to $17,184,000), the exclusion would have been $1 million (not adjusted for inflation), and portability would have been repealed.

Finalizing Estate Planning for 2013 Taxes

The immediate effect of the passage of ATRA is that the law now allows for surviving spouses to be eligible for the benefits offered by portability knowing that those benefits will not be going away. However, in order to take advantage of portability the estates of married decedents must decide whether they want to file a federal estate tax return (Form 706), even if one would not otherwise have been required. Estates have up to 9 months after a person dies to file an estate tax return, but can, and often do, request a six-month extension.

Estates that fall below the exclusion amount are not required to file Form 706, but they must do so in order to make the portability election. The inflation-adjusted lifetime exclusion amount for decedents dying (and gifts made) in 2014 is $5.34 million (up from $5.12 million for 2013). As a result, the estates of a married couple could exempt up to $10.68 from estate (or gift taxes) in 2014 (up from $10.24 million in 2013).

For example, if one spouse died in 2013 after using only $2.5 million of his exclusion for lifetime gifts, his wife would still have her $5.34 million exclusion (or a higher amount depending on the inflation adjustment in the year of her death) as well as the remaining $2.84 million of her husband’s exclusion, which is not indexed for inflation beyond the year of his death. The remaining exclusion would also be available to the surviving spouse for gift tax purposes.

“Without ATRA, the estate tax exclusion would have been only $1 million and portability would have been repealed as of 2013,” said Graziano. “This would have greatly increased the number of estates potentially exposed to the federal estate tax.”

While the permanency of portability may cause some decedent’s estates to consider filing an estate tax return to claim portability, many estate planners believe more traditional strategies may be more effective.

“The estate tax return (Form 706) is very lengthy, with multiple schedules and involves valuation issues and complex tax laws that can make it very cumbersome and expensive to complete,” said Graziano. “Someone who is unlikely to exceed his or her own exclusion amount may not want to go through the expense.”

Additionally, other limitations of portability include the following:

• It is not indexed for inflation. As a result, a spouse who survives considerably longer could see assets worth $3 million, for example, more than double. As a result, any amount in excess of the then available estate tax exclusion could now be taxed as high as 40 percent.
• Additional marriages complicate matters. If a spouse remarries or has additional children, he or she can decide where the property will go; which may not be the same intentions of the decedent spouse.
• Assets are not protected from creditors.

“Some estate planners favor using traditional credit shelter trusts to address these issues,” Graziano added. “But establishing and maintaining such trusts can also present certain costs.”

Estate Planning for 2014 and Beyond: Clear for Now, But Certain Tools May Become Limited

The $5.34 million estate tax exclusion for 2014 (up from $5.25 million in 2013) is inflation-adjusted. The annual gift tax exclusion remains at $14,000 for 2014, as it was in 2013; permitting tax-free gifts of up to $14,000 per donee or $28,000 per couple using gift splitting. 

While this means more estates may be shielded from estate taxes, many lawmakers are looking at ways to minimize the use of some estate planning strategies implemented to further reduce estate taxes. For example, the Administration’s revenue proposals in recent years have targeted Grantor Retainer Annuity Trusts (GRATs) and Family Limited Partnerships (FLPs), among others.

While these techniques were not affected for fiscal year 2013 or 2014, they could be targets again in future revenue-raising proposals. However, estates that move to establish them now, will likely be able to continue to use them.

“If proposals to limit these tools succeed, it’s likely that estates already using them would be grandfathered in, which will ensure that estate tax planning will be a top priority for many wealthy families in 2014,” said Graziano.

Developments in State Estate Taxes Continue to Shift

Most states follow federal estate tax and would have seen a windfall to state coffers had the estate tax sunset to the pre-Bush era maximum 55-percent tax rate on estates over $1 million. However, even though that did not happen, some states have decoupled from federal estate tax law over the past several years as a way of holding onto tax revenues. In many of these states, residents can expect to pay taxes on estates well below the $5.34 million federal threshold for 2014.

“States that have stayed with the federal estate tax law, assuming it would be returning to the lower exclusion amounts, may now reconsider,” said Wolters Kluwer, CCH Estate Planning Analyst James C. Walschlager, MA.

States currently following the pre-Bush era estate tax provisions include: Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Rhode Island and Vermont as well as the District of Columbia. Only Delaware and Hawaii follow the federal estate tax exclusion threshold. A few other states have enacted their own estate tax law separate from federal law. These include Connecticut, Delaware, Maine, Oregon and Washington. Ohio repealed its standalone estate tax and has now recoupled with the federal estate tax law effective as of 2013.

Fifteen states and the District of Columbia also allow same-sex married and/or domestic partners to file joint tax returns. This allows the partners to be recognized under their state’s estate tax laws and thereby enables the surviving spouse to avoid paying any taxes on the decedent’s estate.

Five states have no estate tax at all: Arizona, Indiana, Kansas, North Carolina and Oklahoma.

In addition to estate taxes, seven states also collect an inheritance tax. This is a tax on the portion of an estate received by an individual. It is different from an estate tax, which taxes an entire estate before it is distributed to individual parties. These states are Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee – which is phasing out its inheritance tax in 2015. Assets transferred to a spouse are exempt from the inheritance tax, and some states exempt assets transferred to children and close relatives.

About CCH, a part of Wolters Kluwer 

CCH, a part of Wolters Kluwer (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading solutions are The ProSystem fx® Suite, CCH Axcess™, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Follow us on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

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