Hot Topics in Estate Planning
A quick recap of some hot topics in the estate planning world this year:
Portability is here to stay. Portability, as the name suggests, enables the porting of a married decedent’s unused estate and gift tax credit to the surviving spouse. In the past, this required a credit-shelter or bypass trust. Portability can therefore add simplicity to an estate plan for spouses by removing from the plan a trust created solely to preserve the credit. Also, with a married couple’s combined credit of $10 million, indexed for inflation, portability, and the simplicity it affords, is an important consideration in most estate plans for married couples.
A high unified credit for estate, gift, and generation-skipping transfer taxes is “permanent,” meaning it doesn’t have an expiration date. The size and indexing of the credit have made planning for gift and estate taxes a non-issue for most estates. Estate planners are now directing more attention to the traditional non-tax reasons a client may have for creating a trust. Possible non-tax reasons include asset protection (e.g., from creditors and lawsuits), asset management (e.g., by professional trustees and for incapacitated persons), and controlling who ultimately receives the client’s property. The high unified credit has also created a renewed emphasis on minimizing income taxes on estates and estate beneficiaries. No doubt, this renewed emphasis is also attributable to the new 39.6 percent income tax bracket, the new 20 percent tax rate on qualified dividends and long-term capital gains, and a new 3.8 percent Medicare tax on net investment income for high income earners.
A federal law was proposed that would limit the time period over which a beneficiary (other than a spouse or minor) could stretch out distributions from qualified plans and IRAs after a decedent’s death. Under current law, the beneficiary could stretch out those distributions over the beneficiary’s life expectancy and thereby delay paying income tax on the distributions. A provision found in some federal legislation, however, would limit the stretch out period to five years, accelerating the collection of income taxes. Various commentators have noted that this source of revenue is tempting to federal legislators and we should expect similar proposals in the future.
Section 3 of the Defense of Marriage Act is declared unconstitutional by the Supreme Court. To carry out that decision, the IRS issued Revenue Ruling 2013-17, adopting the general rule that, for federal tax purposes, a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage is recognized, “even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.” (emphasis added). The ruling is broad sweeping and prompts many questions concerning how it will be administered.
To conclude, estate planners have had a lot of hot topics to discuss this year. To think, the year still is not over. For people who have not had their estate plans looked at in a while, now there are many more reasons to do so.
For more information on this topic, please email Alex Longoria or call him at (832) 726-1000.
