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Guidance for Estate and Gift Tax Planning

Simplifying Estate and Gift Tax Planning: Wolters Kluwer Updates Key Federal and State Estate and Gift Tax Rules

(RIVERWOODS, IL, January 2016) — Calculating estate and gift taxes can be challenging even for the most seasoned tax professional. Although it's occasionally a hot topic of debate on Capitol Hill, no major legislation has been passed recently that applies to estate or gift taxes.

Updates for 2016 Estate and Gift Taxes

The inflation-adjusted lifetime estate tax exclusion amount for decedents dying (and gifts made) for 2016 taxes is $5.45 million — meaning that estates valued at that amount or lower are excluded from estate taxes (up from $5.43 million for 2015). As a result, the estates of a married couple could potentially exempt twice as much, up to $10.9 million from estate (or gift taxes) for 2016 transfers.

The annual gift tax exclusion remains at $14,000 for 2016, as it was in 2015; 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 2016, 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 become law, it's likely that estates already using them would be grandfathered in, but as with any new legislation you always have to be cognizant of the effective date," said Bruno Graziano, JD, MSA and Senior Estate Tax Analyst for Wolters Kluwer Tax & Accounting.

Examples of new rules that did make the legislative agenda for 2015 include those governing consistent basis reporting for both estate tax and income taxes with respect to property received from a decedent and the early termination of certain charitable remainder unitrusts (CRUTs). Separately, a new provision states that gift taxes do not apply to contributions made to certain tax-exempt organizations.

State Estate Tax Developments

Although many states have historically based their estate tax laws on the federal estate tax, in recent years some have passed their own "stand-alone" estate tax laws as a way of holding onto tax revenues. They include Connecticut, Delaware, Maine, Minnesota, New York, Oregon and Washington State.

Eight states have no estate tax at all: Arizona, Georgia, Indiana, Kansas, North Carolina, Oklahoma, South Dakota and Texas. Other states, such as California and Florida technically still have a tax on the books, but their taxes are based on the now-repealed federal credit for state death taxes and it is highly doubtful that the federal credit will ever be reinstated. Consequently, those states do not tax the transfer of an estate either.

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. The Tennessee inheritance tax no longer applies after 2015. Assets transferred to a spouse are exempt from the inheritance tax and some states exempt assets transferred to children and close relatives.

Maximum Rate Impact

When the American Taxpayer Relief Act (ATRA) of 2012 was signed into law, it implemented a permanent maximum estate tax rate of 40 percent. It also provides an exclusion from estate taxes of up to $5 million dollars (indexed for inflation), as well as other changes.

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 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.

Rules for Surviving Spouses and Portability

Under ATRA rules, surviving spouses are 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.

For example, if one spouse died in 2016 after using only $2.5 million of his exclusion for lifetime gifts, his wife would still have her $5.45 million exclusion (or a higher amount depending on the inflation adjustment in the year of her death) as well as the remaining $2.95 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.

"Not only did the law create a new permanent top tax rate, it also made portability permanent," Graziano added. "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. Also, 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."

Additional Key Points on Estate Taxes and Portability

  • 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.
  • Portability amounts are not indexed for inflation that occurs after death. As a result, a spouse who survives considerably longer could see assets worth $3 million, for example, more than double. Accordingly, any amount in excess of the then available estate tax exclusion could now be subject to tax at 40 percent.
  • 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.

“Despite the addition of portability, at least some estate planners still favor using traditional credit shelter trusts to address these issues,” Graziano added. “But establishing and maintaining such trusts can also present certain costs.”

About Wolters Kluwer Tax & Accounting

Wolters Kluwer Tax & Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency.

Wolters Kluwer Tax & Accounting is part of Wolters Kluwer (www.wolterskluwer.com), a market-leading global information services company. Wolters Kluwer had 2014 annual revenues of €3.7 billion ($4.2 billion), employs approximately 19,000 people worldwide, and maintains operations in over 40 countries across Europe, North America, Asia Pacific, and Latin America. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are listed on NYSE Euronext Amsterdam (WKL), on Bloomberg (WKL NA) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).

More Information

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