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Is it Time to Update Your Estate Plan


Over the past several years, there has been considerable change in the estate tax area, as well as considerable uncertainty as Congress continued to extend the estate tax laws for short periods of time. However, with the enactment of the American Taxpayer Relief Act of 2012 (ATRA), there is now a permanent estate tax law (at least permanent in the sense that the ATRA does not have an expiration date; however, Congress may certainly make changes in the law in the future).

Under ATRA, the estate, gift and generation-skipping tax rate is 40%, and the estate, gift and generation-skipping exclusion in 2016 is a unified amount of $5.45 Million. Congress also made permanent the concept of “portability” of a deceased spouse’s unused exclusion amount. Taxpayers should realize, however, that more and more states (although not Arizona) are imposing estate and/or inheritance taxes which contain a lower exclusion amount. Hence, in estates with properties in other states, planning for state gift and/or inheritance taxes may be appropriate. In addition, the capital gain tax rate has increased for many taxpayers.  Thus, planning for a step-up in the tax basis of the assets of a decedent has become more important.

Married Persons with Combined Estates less than $5,450,000.  For married persons with combined estates less than $5,450,000, it may now be possible to significantly simplify their estate plan following the first death. Previously, many plans for married persons called for the decedent’s share of the assets to be set aside in one or more separate trusts following the first death. Creating this separate trust requires the decedent’s share of trust assets to be titled separately and reported on an income tax return separate from that of the surviving spouse.

Since the federal estate exemption is $5,450,000, and scheduled to adjust upward, it may not be necessary to create this separate trust for the decedent’s share of the trust assets. Instead, all of the trust assets could simply continue to be held in the trust for the surviving spouse without any requirement for separate accounting or additional income tax returns. However, under this arrangement, the surviving spouse has full access to all of the assets, including the decedent’s assets, and the ability to change the remainder beneficiaries of such assets.  Accordingly, this approach may not be the best arrangement for a married person with children from a prior relationship.

Married Persons with Combined Estates in the $5,000,000 to $10,000,000 Range.  For married persons with combined estates in the $5,000,000 to $10,000,000 range, their existing plans may also be overly complicated and some simplification may be possible. With the concept of portability, it is no longer necessary that the decedent’s share of trust assets be held in a separate decedent trust. Under this approach, if a decedent is married and his/her estate does not fully utilize the available exclusion amount, the unused portion is available for use by the surviving spouse. However, there are circumstances where separate decedent and survivor trusts are still advisable.  Further, since the capital gain tax is now a bigger consideration, older estate plans may expose the surviving spouse and other beneficiaries to capital gains taxes that could have otherwise been mitigated or avoided.

Changes in Family Circumstances.  Finally, over a period of time, changes normally occur in family circumstances such as children becoming more able to manage their own financial affairs (or unfortunately, the opposite occurring when a child has creditor, marriage or other issues that make it advisable that he or she not manage his or her share of any assets), changes in persons designated as successor personal representatives, successor trustees, agents under financial or medical powers of attorney and the organizations designated to received charitable gifts. For this reason, notwithstanding how the tax law changes may affect your plan, it is always advisable to review estate planning documents in light of the changes in family circumstances.

If you would like to schedule an appointment with our firm to review and update your documents, please do not hesitate to contact us.

*The content of these articles shall not be interpreted or construed as legal advice. These articles are not routinely updated, so if you have any questions or concerns relevant to any topic referenced herein, please contact an attorney.