Estate Planning After ATRA

By Beth Gamel

These significant changes to the estate, gift and generation-skipping transfer tax system in the recently enacted American Taxpayer Relief Act of 2012 (ATRA) present new estate, gift and insurance planning opportunities.

Given these changes, here are a few things you should consider.

  1. Read your Estate Documents
    Before 2013 the estate plan of many married couples included a Family Trust (also known as a Credit Shelter Trust) and a Marital (or QTIP) Trust. These “formula clauses” provided that the maximum federal estate tax exemption amount would pass to the Family Trust at the first spouse’s death, with the balance of the estate distributed outright to the surviving spouse or passed to the QTIP Trust. This structure made sense when the maximum federal estate tax exemption was well below $5.25 million but may not produce the results you want now.
  2. Should Portability Be Part of Your Plan?
    Portability allows a surviving spouse to use the unused estate tax exemption of a deceased spouse to shelter lifetime gifts from gift tax or to pass additional assets free of estate tax at the surviving spouse's subsequent death.

    Let’s look at an example with a married couple, Bob and Sue, whose assets are jointly titled and have a net worth of $8,000,000. Prior to portability, if Bob died first and the federal estate tax exemption was $5,250,000, Bob would not use any of his exemption since all of the assets are jointly titled and the unlimited marital deduction would allow Bob's share of the joint assets to be automatically transferred to Sue without incurring any federal estate taxes. If Sue died a few years later, and the federal estate tax exemption was still $5,250,000 and there had been no asset growth, her taxable estate would be $2,750,000 ($8,000,000-$5,250,000). That’s because Bob's $5,250,000 estate tax exemption was completely wasted. With portability, Bob's unused estate tax exemption would be added to Sue's $5,250,000 exemption, allowing her to pass on up to $10,500,000 free from federal estate taxes at the time of her death. 

    Portability obviously provides benefits, but it presents these challenges:
    • Even a non-taxable estate will have to file an estate tax return, which could keep the return open for many years.
    • If the surviving spouse remarries, portability is lost
    • Portability does not apply for GST purposes
    • Assets at the surviving spouse’s death may have increased in value, but the unused exemption has not.
  3. What About State Death Taxes?
    Massachusetts is among the 22 states that have a separate state death tax. As most of these states have an estate tax exemption amount well below $5.25 million ($1 million in Massachusetts), planning for state death taxes is essential.
  4. Rethinking Life Insurance
    People buy life insurance for a variety of reasons, many of which make sense regardless of the size of the estate tax exemption. But if you purchased insurance solely to create estate liquidity, you should ask if that coverage makes sense with a $10+ million exemption between spouses. Among the reasons to keep your present whole life or universal insurance policies are: tax-free borrowing, additional retirement funding, and if you’re in the top 39.6% tax bracket and subject to the 3.8% Medicare surtax, a tax-favorable investment.

    Unless you’re among the ultra wealthy, the post-ATRA world allows you to focus on estate planning, not just estate tax planning. Now is a good time to meet with your advisors to discuss how to create a plan that reflects your wishes and family circumstances.

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