The potential for portability of a deceased spouse's unused exemption amount (DSUEA) to a surviving spouse was a significant change that emerged from the fiscal cliff legislation in 2010. However, early adoption of portability was limited, due both to a lack of awareness of the rule by many of those who needed it, and the fact that the portability rules were just "temporary" and faced future sunset until subsequently made permanent under the Taxpayer Relief Act of 2012... and by that time, it was already too late for many who might have wished to claim portability.

To provide relief for this unfortunate situation, the IRS has issued Revenue Procedure 2014-18, which will allow any decedent who passed away in 2011, 2012, or 2013 to have an extension to file an estate tax return and claim DSUEA portability for the surviving spouse. However, the relief provision reopening portability for anyone who died in the past 3 years is temporary; the Form 706 estate tax return must be filed by the end of 2014 to claim this "retroactive" portability, or the window will once again be closed for good.

For many surviving spouses, this opportunity for retroactive portability is an appealing relief provision to get a "free" second chance to claim portability and carry over a decedent's unused estate tax exemption amount; the only requirement is that a Form 706 estate tax return now be filed. In situations where the surviving spouse has also since passed away, the potential for retroactive portability could actually result in an immediate and significant estate tax refund. And notably, for same-sex spouses - who couldn't file for portability in 2011, 2012, or most of 2013 because the marriage wasn't recognized in the first place - the new relief provisions of Rev. Proc. 2014-18 offers the opportunity to go back and claim portability for a same-sex surviving spouse who never had the opportunity in the first place!

Wednesday, February 12th, 2014 Posted by Michael Kitces in Estate Planning | 2 Comments

The past decade has been a tumultuous one for the world of state estate taxes. What had been a rather stable structure for decades, with the Federal credit for state estate taxes paid that allowed states to create a "sponge tax" to absorb the maximum Federal credit, was brought to an end with the Economic Growth and Tax Relief Reconciliation Act of 2001, and in the years that followed the system was phased out and replaced with a state estate tax deduction instead. As a result, states faced the possibility that their estate tax revenue would drop to zero, which is in fact what happened for all states by 2005 that did not "decouple" from the Federal system to create their own state estate tax, often with their own exemptions.

Yet the reality is that for the remainder of that decade, states had continued to rely upon the Federal $1,000,000 gift tax exemption threshold to effectively "backstop" their state estate tax systems; after all, without any gift tax system, the estate tax doesn't really work, as people simply gift the money away before they die to avoid paying the tax at death. In turn, a new wave of state estate tax "disruption" occurred at the end of 2010 when the fiscal cliff legislation "reunified" the Federal gift and estate tax systems, bringing up the Federal gift tax exemption from $1,000,000 to an inflation-indexed $5M+ level, removing in the process the Federal gift tax support structure for the states that still had a gift tax.

As a result, in today's environment the states remaining with a state estate tax find themselves in an untenable position; most have an estate tax but no gift tax, which just invites citizens to either give away the money before they pass away, or relocate and change their residency to another state to another the tax (which causes the state loses income, property, and other tax revenue as well!). To fix the problem, states are increasingly compelled to come up with a solution: either enact gift taxes themselves to backstop the system (and then hire auditors to oversee and enforce the system); repeal the estate tax; or "recouple" the state back to the Federal system, to once again rely on the Federal tax structure and the IRS to backstop the states. Ultimately, it remains to be seen which path the states will pursue, but the likelihood for legislation is increasing - some states are considering proposals already - which means the time window is quickly closing for anyone who actually wishes to take advantage of the state estate tax "loophole" that still exists today!

Wednesday, January 15th, 2014 Posted by Michael Kitces in Estate Planning | 6 Comments

Helping clients through their estate planning is a core part of the financial planning process - and of course, the reality is that the orderly resolution of an individual's affairs after they pass away is an issue that long predates financial planning itself. Though the rules have changed significantly over the years and decades, the courts have long played a role in ensuring that property is distributed properly, albeit with some cases a bit more orderly than others.

Yet in today's world, a unique new type of property is being introduced for the first time: digital assets. In this guest post, financial planner William Bissett shares an example of a potentially problematic client scenario, where it's necessary to help a client through not only the traditional estate planning process for their "traditional" assets, but also to recognize that the matter has grown significantly more complex as clients must also resolve everything from online billpay to recovering photos from social media accounts.

Going forward, helping clients plan for their digital assets may become increasingly important as more and more of our lives are move (or at least are captured) online. Though the laws themselves are still a bit murky on how to handle such situations - and perhaps, because of that fact - it is crucial to at least help ensure that clients have an inventory of their various digital accounts and digital assets, to help surviving spouses and heirs to get through the process as smoothly as possible.

Tuesday, September 24th, 2013 Posted by Michael Kitces in Estate Planning | 1 Comment

In late 2012, a new estate planning strategy emerged - the so-called "Spousal Lifetime Access Trust" (or SLAT for short). The basic concept of the SLAT was relatively straightforward: it would function like a bypass trust, but be funded during life instead of at death, with the intention of using it to take advantage of the then-current $5.12M estate tax exemption before it dropped back to $1M as was scheduled for 2013.

Ultimately, the estate tax fiscal cliff didn't happen, but the SLAT remains valid in 2013 and beyond for a new purpose: planning around state estate taxes, and the mismatch between the numerous states that have only a $1M state estate tax exemption and no gift tax, while the Federal gift and estate tax exemptions are at $5.25M. Given this "decoupling" of the state estate tax from its Federal gift tax - and the lack of any state gift tax backstop - couples have a unique opportunity to manage or avoid state estate taxes by creating "supercharged bypass trusts" in the form of SLATs funded during life.

The caveat to the strategy is the "reciprocal trust" doctrine, which can cause SLATs to become "uncrossed" and taxable in the original donor's estate. Fortunately, reciprocal trust treatment can be avoided. Unfortunately, though, the rules to avoid reciprocal trust treatment are based on the facts and circumstances of the situation, and consequently a focus for the IRS and estate planning attorneys in the coming years may be figuring out how best to avoid the reciprocal trust doctrine without actually ruining the client's financial and estate planning goals.

Nonetheless, though, the reality remains that the SLAT may be increasingly popular in the coming years, at least until states implement a gift tax, recouple to the Federal gift and estate tax system, or just repeal their state estate taxes entirely.

Wednesday, May 22nd, 2013 Posted by Michael Kitces in Estate Planning | 1 Comment

As a part of the resolution to the fiscal cliff, the American Taxpayer Relief Act of 2012 (ATRA) extended and made permanent a number of important tax code provisions that impact estate planning, including the now-$5.25 million estate tax exemption (after inflation indexing), and the portability of a deceased spouse's unused exclusion amount (DSUEA) to carry over some or all of that $5.25 million to a surviving spouse. The end result of these changes: married couples can shelter as much as $10.5M of net worth from the estate tax system simply by doing nothing more than leaving everything to a surviving spouse with a simple Will and filing an estate tax return.

The ramifications of these changes will significantly impact estate planning for years to come, as the higher exemption drastically reduces how many people will be subject to the estate tax in the future, and portability in particular renders the use of bypass trusts largely irrelevant. In fact, bypass trusts actually become an adverse strategy for many, given both the direct cash costs of trust drafting and administration, and the indirect income tax consequences like compressed trust income tax brackets and the loss of any step-up in basis at death.

While bypass trusts will still remain relevant in some situations, from their usefulness to shelter future growth from taxation for very high net worth couples and to preserve the GST exemption (which is not portable), to their utility for state estate tax planning. In addition, use of trusts in general will remain relevant for many non-tax reasons, especially asset, divorce, and spendthrift protection. Nonetheless, the bottom line is that with the new rules, esecpially portability of the estate tax exemption, it may be time to bypass the bypass trust for the overwhelming majority of Americans!

Wednesday, January 16th, 2013 Posted by Michael Kitces in Estate Planning | 26 Comments

As the end of 2012 approaches, so too does the end of our current gift and estate tax exemptions and rates - with the so-called "fiscal cliff" the estate tax exemption is scheduled to fall precipitously in 2013, while the maximum estate tax rate rises. As a result, many high net worth clients have been encouraged to consider gifting away significant sums of money this year - to take advantage of the current exemption - before it lapses. And as with most gifting strategies, often the least effective means is to simply gift cash; instead, popular strategies include using a Family Limited Partnership (FLP) to obtain a valuation discount for the assets being gifted, or alternatively to gift the money to an Intentionally Defective Grantor Trust (IDGT) and use it as seed money to buy even more assets out of the estate. Unfortunately, though, there are many important caveats, including the risk of an estate tax clawback, the affordability of the gift itself, and coordination with state estate tax laws. Nonetheless, with the estate tax exemption amount scheduled to drop more than 80% in just a few months, the pressure is on for many clients to make a decision about whether they will engage in an end-of-year gifting strategy or not - or at least, prepare so that they can complete such a gift once the outcome of the election is known!

Wednesday, October 17th, 2012 Posted by Michael Kitces in Estate Planning | 2 Comments

As Congress and the White House continue to search for revenue to close the gap on the US fiscal deficit, numerous estate planning strategies - especially for high net worth clients - are coming under attack. Recent legislative or budget proposals have threatened the use of both Grantor Retained Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs), both popular strategies to "freeze" the value of hopefully-rapidly-appreciating assets for transfer to the next generation. In addition, the new rules on portability - currently temporary, but likely to become permanent at some point in the future - threaten the even more popular and common estate planning strategy, the bypass trust. While the exact timing for when these new rules become permanent law, the reality is that change appears to be coming. As a result, some clients may wish to accelerate the implementation of strategies before the laws change... while others may prefer a wait-and-see approach before deciding what estate planning strategies to implement at all!

Wednesday, July 4th, 2012 Posted by Michael Kitces in Estate Planning | 3 Comments

Since the beginning of 2011, clients who pass away and leave their assets to their spouse have been able to bequeath not only their property, but also their unused estate tax exemption. As a result, bypass trusts are no longer necessary to preserve the estate tax exemption of the first spouse to die. Unfortunately, though, the portability of the estate tax exemption is only temporary, and is scheduled to expire at the end of the year. Recently, though, the Treasury put forth Proposed and Temporary Regulations, intended to clear up some areas of confusion around portability, and invite public comments to further press towards Final Regulations. While the regulations bring some welcome clarification - and a few positive changes for planners as well - the fact that the Treasury went through the trouble of working on regulations also suggests that they, too, expect portability to ultimately become permanent. While most planners aren't counting on the change yet, the new regulations do provide a good opportunity to better understand the details of portability and how it may play out in the future.

Tuesday, June 26th, 2012 Posted by Michael Kitces in Estate Planning | 1 Comment

As the country continues to struggle with its fiscal woes, Congress and the White House are increasingly proposing tax law changes intended to cut down on perceived "abuses" and "tax loopholes" - especially those used by the wealthy. The latest, in the President's Fiscal Year 2013 budget, is a proposal to change to the estate tax laws, requiring any grantor trust to be included in the estate of the grantor (or pay gift taxes if the grantor trust assets are distributed before the grantor's death). The proposal would kill the popular Intentionally Defective Grantor Trust (IDGT) estate planning strategy, which works specifically by relying on the fact that a trust can be a grantor trust for income tax purposes even while being excluded from the grantor's estate for estate tax purposes - after all, if the grantor trust is automatically included in the grantor's estate, there's no longer any value to make gifts or sales of property to an IDGT. While the rules are only proposed at this point - and would only apply to trusts created in the future, after the enactment date of any legislation - the fact that the change was proposed at all suggests that the days of IDGT planning strategies may be numbered. 

Tuesday, May 29th, 2012 Posted by Michael Kitces in Estate Planning | 6 Comments

In 2012, planners and clients once again face the proposition of the estate tax 'sunset' that next year may revert the estate tax exemption and rate back to their 2001 levels. This impermanence in the current rules, with a scheduled lapse to a less favorable environment, creates an opportunity for clients to take decisive action while the current rules hold. Yet at the same time, if Congress ultimately does extend the current rules, decisive action may simply lead to irrevocable transfers that prove to be unnecessary, but cannot be unwound after the fact - a potential hardship for all but the wealthiest of ultra high net worth clients. And the reality is that there is little historical precedent for Congress to actually decrease the estate tax exemption or increase the estate tax rate - such a shift hasn't occurred since World War II! Accordingly, some planners have begun to lean in the opposite direction - viewing the current environment not as one for decisive action, but one for tentative flexibility and a wait-and-see approach. 

Tuesday, April 10th, 2012 Posted by Michael Kitces in Estate Planning | 2 Comments

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