When it comes to the estate tax, the coast is clear, at least for now. Much of last year was spent talking about the coming tax apocalypse, or “taxmageddon” as some called it. Turns out, it was much ado about nothing. Thanks to passage of the American Taxpayer Relief Act (ATRA) in January 2013, the estate exemption remained at $5 million per person (indexed for inflation). The tax legislation also eliminated the need for credit shelter trusts for most married couples. In essence, the passage of ATRA means that estate tax planning is not going to be a major concern for many as it was in the past.
So, if estate tax planning is no longer a major concern, what is there left to do? Lots.
First, you may want to consider amending your current trust to simplify things. Many trusts that I have reviewed lately are what I consider “ancient” for lack of a better term. They were drafted way back in the 90s when the estate tax law was completely different than what it is today, and for most, they just don’t make any sense. They may make sense for a couple with a net worth close to $10 million, but a couple with a combined net worth of around $1 million does not need the complicated trust that they have with all the special sub-trusts that come with them. As with anything there are exceptions to the rule, but for the most part, if you find yourself on the lower side of $10 million, chances are that that the trust that you have is overkill.
Second, if you started gifting your assets away in anticipation of taxmageddon, and your estate is under $10 million, think about stopping. Here’s why. Income tax rates are going up. This is especially the case in high tax states like California where the combined top marginal rate is 47.6%. If you inherit property, you receive a stepped up income tax basis equal its fair market value as of the transferor’s date of death. However, if you receive the same property during the transferor’s lifetime, you don’t get the step up. Instead, your income tax basis is whatever the transferor paid for it many years ago, and when you sell the property, you may have to pay tens of thousands of dollars income tax. This is a critical error that many elderly parents make before they pass away. That is, right before they die, they decide to quitclaim their home to the children not realizing that this move greatly diminished the net value of the gift.
Third, for those that are charitably inclined, creating a charitable remainder trust is a good income tax strategy. Even if you are not so inclined, creating a charitable remainder trust is still a good income tax strategy. If you have low basis property and live in a high income tax state, a sale through a charitable remainder trust will shield the gain from taxation. The alternative is to give up almost of half of the gain in taxes.