Year End Tax and Estate Tax Planning in Light of Likely Tax Reform

It’s that time of year again: here are our year-end recommendations concerning estate planning.  There are important things to consider given looming tax reform and now is a good time for a New Year’s resolution to give your plan a tune-up.  Given the election, existing estate plans should be reviewed to plan for upcoming changes.

Tune Up Your Estate Plan

  • You should, as always, review your estate planning documents to confirm they are up to date and reflect your current situation.  Consider if any changes need to be made to bequests, executors, trustees, guardians, powers of attorney, and health care documents.  Make sure your retirement plan, insurance, and other beneficiary forms are current and coordinate with your plan.  Changes may be warranted if you sold an asset or business, you have a new job, a child married, you became a grandparent, a marriage ended, someone died, or if there is a need for asset management protection for you or a family member.

Federal Estate, GST and Gift Taxes

  • For 2017, the Federal estate tax exemption rises $40,000 to $5,490,000.  A married couple can pass up to $10,980,000 free of Federal estate tax.  “Portability” between spouses means that any unused Federal estate exemption of the first spouse to die can be added to the surviving spouse’s exemption for the survivor’s gifts or estate.
  • However, do not abandon keeping your estate plan up to date because the combined Federal exemption for a couple is now so large. State exemptions are lower and portability does not apply to state exemptions.

New York Estate Tax

  • New York State’s exemption is now $4,187,500 and will increase to $5,250,000 on April 1, 2017. As of January 1, 2019, New York’s exemption will track the Federal exemption.
  • However, you cannot transfer your state exemption to your spouse. It’s “use it or lose it.”
  • It is very important to note that New York has an estate tax “cliff”: once an estate exceeds 105% of the New York exemption there is no exemption at all and the entire estate (not just the excess) is taxed.
  • To avoid losing both exemptions, married couples must continue to use “credit shelter,” “bypass,” or “exemption” trusts as part of their estate plans. Furthermore, a trust for a spouse ensures at least part of the assets pass to your children as you both agree, especially if the surviving spouse remarries or is a second spouse who becomes estranged from your children.

Revocable Trusts

  • Probate is an unnecessary expense and delay in administering an estate. A revocable trust funded with your assets is recommended to avoid costly court supervision of trust administration.  Probate can also be avoided by joint ownership, “in trust for” accounts, and designating beneficiaries.
  • If you own real estate in a state other than your home state, a revocable trust can eliminate the requirement to probate in that other state. The more organized and consolidated you make your finances, combined with the use of a revocable trust, the more your executor and heirs will thank you (and you will save them money and aggravation).

Tax Free Gifts

  • You can give $14,000 ($28,000 if you are married) to as many people as you choose without dipping into your lifetime exemption ($5,490,000 in 2017). Gifts can be made outright, to trusts, and to 529 college savings plans.
  • You can “front-load” 529 plans with up to five years’ worth of annual gifts ($70,000 or $140,000 if married).
  • Tuition and medical bill payments are also gift tax free if made directly to the school or provider.
  • The annual exclusion for gifts to a non-citizen spouse will increase from $148,000 to $149,000 in 2017.

Avoiding Capital Gains Taxes

  • Looming tax legislation may reduce effective capital gains rates, making gift and estate planning essential. Planning must balance minimizing capital gains taxes and taking maximum advantage of the “step-up” in cost basis assets receive at death.  Joint ownership or placing assets in the name of the spouse who may be more likely to die first can maximize the step-up.  Please let us review your asset structure to determine how to construct the optimal plan. Your estate planning documents need to coordinate with assets now more than ever for this reason.

College Students

  • An eighteen-year old child is an adult in the eyes of the law. This means that parents no longer have a right, or face hurdles and delay, to speak to doctors, see their child’s medical and financial records, or make critical decisions on their behalf.  It is a good idea for your young adult to designate you as a health care decision maker, permit you access to medical information, and grant you a power of attorney.  And if your young adult has an old custodial account that is substantial, consider creating a trust for the child’s benefit, with you as Trustee, until he or she reaches a more mature age.  The funds are legally the child’s now and available to him or her.

Trust or Pre-Nup?

  • People are marrying later in life, when they’ve established careers and amassed significant assets, or marry for a second or third time. Pre-nuptial agreements can safeguard property and assets accumulated before a marriage, but must be carefully prepared and often lead to tensions on the eve of a joyous occasion.  Both sides must be represented by attorneys and there must be full asset disclosure.  They cannot be prepared on the eve of the wedding.  Trusts, however, created by the individual to be married or his or her parents may be another way to address the issue and ensure that separate and inherited property remains separate after a marriage.  Transferring property to a trust may accomplish the same outcome as a pre-nup with less stress.  Consider including them in your estate plan to protect your children from a spouse.

Estate Planning for Same-Sex Couples

  • Same-sex couples have the same tax benefits and protections that are available to heterosexual couples. Same-sex couples who are married or plan to marry should review their estate plan. Transfers between same-sex couples are free of Federal gift tax, but there are income tax reasons to consider before assets are transferred.

3.8% Medicare Surtax

  • A 3.8% surtax on net investment income was enacted in 2013 as part of health care reform, but as noted above, is slated for repeal under the Republican Blueprint and Trump tax reform plans.
  • It applies to higher income individuals, but also applies to trusts and estates who have net investment income in excess of $12,300 in 2016. Trusts and estates should consider end of year distribution strategies to reduce or eliminate the tax.

Major Gift Planning

  • Gifting techniques that take advantage of still very low interest rates are still attractive and should be considered as they can produce highly advantageous results for your family. Techniques such as Grantor Retained Annuity Trusts (“GRATs”), Charitable Lead Trusts (“CLTs”), sales to Intentionally Defective Grantor Trusts (“IDGTs”), and loans to your children are among those to be considered.  Moreover, future appreciation on gifted assets benefit the gift recipient and escape estate taxes.  Family partnerships – slated for phase out given pending negative IRS regulations – are still an available planning tool as the election results make the enactment of those regulations unlikely.

Charitable Gift Giving

  • Consider gifts of appreciated stock to satisfy your charitable giving. The charity pays no capital gains tax on the sale of the stock as you would, essentially allowing you to make charitable gifts at a reduced cost to you.
  • Consider creating a “donor advised fund” administered by a local community trust. You can make a gift in 2016 to your donor advised fund, and take a charitable deduction for 2016, but defer distributions to charities of your choice until the need for a contribution arises.  The funds are invested until distribution and community trusts offer planned giving advice to help you choose reputable and effective charitable recipients.
  • If you are over 70½, use up to $100,000 from your IRA to make gifts to a charity directly from your IRA and pay no income tax on the amount. The distribution (called a “Qualified Charitable Distribution”) counts towards your annual required minimum distribution, but you will not receive a charitable income tax deduction.  If interested, check with us or your accountant.

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We welcome an opportunity to discuss these important issues with you.  Please contact Doris L. Martin (516-393-2205, or Michelle Lewis Salzman (516-393-2504, to discuss these ideas further.