Estate tax laws will
change significantly over the next few years. As of this writing, the estate
tax exemption amount (the amount that can be transferred at death without tax)
will be $1 Million in 2013 and later years. At any time, Congress could change
this exemption amount. Most practitioners appear to believe that the exemption
amount will settle somewhere between $3.5 Million and $5Million in 2013. This
is because President Obama advocated a $3.5 Million exemption amount while
running for President, and Republicans favor a higher exemption amount or an
outright repeal of the tax. For the rest of 2012, the exemption amount is $5
Million.
An exemption amount
that is either too low or too high, or an outright repeal of the estate tax,
could have significant consequences for families with estate plans in place or
for those with no planning at all. For instance, couples with A-B trust may not
require the “B” or Bypass trust if the exemption amount remains high. In such a
case, if the surviving spouse follows the directions in the trust and funds the
Bypass trust, capital gains tax might result which exceeds the amount of any
estate tax, as there would be no step up in the basis of property held in the
bypass trust at the death of the surviving spouse.
A similar problem results if “portability”
applies, or if Congress repeals the estate tax. In the event that “portability”
applies (not certain for 2013) or future years, a funded bypass trust may not
be necessary. In the event of an outright repeal, Congress would likely replace
the estate tax with carry over basis. Carry over basis means that the basis of
property at the death of an individual “carries over” to the beneficiary rather
than “stepping up” to the value at the date of death. Whether “portability” or an outright repeal
applies, carry over basis could result in potentially higher capital gains tax.
Moreoever, it also results in
uncertainty when determining the basis of property: Many individuals are not
aware of the purchase price of stocks, automobiles, and even real property that
was acquired before the widespread use of digital records.
Another example of how
the changing exemption amounts cannot be easily planned for is the case of a
spouse with a joint estate under $5 Million who dies in 2012, leaving a spouse
who survives into 2013. In this case, if the exemption amount is ultimately
increased to $5 Million, it wouldn’t make sense to fund a bypass trust. However,
if the exemption amount stays at $1 Million, the bypass trust should be funded
in order to avoid potential tax at the death of the surviving spouse.
In order to prepare for
increases in the exemption amount, portability, or an elimination of the estate
tax, a third party can be designated in the trust who can toggle “on” and “off”
the provisions in a bypass trust which exclude the property therein from the
surviving spouse’s estate. This strategy would avoid the loss of basis step up
and result in additional benefits: the asset protection or family inheritance
protection aspects of the bypass trust could be preserved.
If you have questions, contact our San Jose Estate Planning Attorneys.
NOTICE: While we would
love your business, we cannot represent you as an attorney until we are able to
determine that there are no conflicts of interest between yourself and any of
our existing clients. We ask you not to send us any information, (other than as
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DISCLOSURE
UNDER TREASURY CIRCULAR 230: The United States federal tax advice, if any, contained in
this website and associated websites may not be used or referred to in the
promoting, marketing, or recommending of any entity, investment plan, or
arrangement, nor is such advice intended or written to be used, and may not be
used, by a taxpayer for the purpose of avoiding federal tax penalties.
