Estate and/or Trust Planning

Legacy planning is quickly growing into a huge industry. It appears that the Government is trying to cash in on the industry, but recognizes that it is an emotionally sensitive area and a poor election or re-election platform. For this reason, the rules keep changing while our elected officials try to find the voters’ tolerance level. In the meantime, it is creating a legacy planning nightmare.

  • The Federal estate exemption is $5.34 million in 2014 and $5.43 million in 2015. Translation: If the fair market value of the deceased’s property on the date of passing is less than the above figure, the estate probably will not need to file a federal estate income tax return. I’ve highlighted the word “probably” on purpose, because if this is an Illinois estate, the state exemption remains at $24 million and the Illinois estate income tax return is based on the federal estate income tax return. Translation: If the fair market value on the date of passing is equal to or greater than $4 million, the estate will need to prepare but not submit the federal estate income tax return in order to prepare the Illinois estate income tax return.
  • Adding to the complexity, the Government added “portability” to the federal estate tax exemption for married couples. One of the main reasons for establishing an irrevocable trust was to maximize the estate tax exemption – this is no longer the main reason for the irrevocable trust. The “unused” portion of the first spouse’s exemption transfers to the surviving spouse, effectively increasing the exemption to $10.68 million for married couples. The catch, as of today’s date, none of the States with estate taxes adopted the “portability” of the estate exemption.
  • Excludable or tax free gifts remain at $14,000 per year and per individual. However, you may also tap into the unified credit of the estate tax exemption of $5.34 million in 2014 and $5.43 million in 2015. So, say you wish to gift $30,000 to your son, you actually have a couple of choices:
  1. If your son is married, write a $14,000 to his spouse and write a $17,000 check to your son. Only $3,000 is subject to gift tax at 40%.
  2. If your son is not married, and time is not an issue, write a $14,000 check to your son in 2014 and on January 1, 2015, write a check for $17,000. Once again, only $3,000 is subject to gift tax at 40%.
  3. Or write the total $30,000 check payable to your son in 2015. File the gift tax return for the $16,000 taxable gift at 40%.
    • If you pay the gift tax, it then becomes a deduction on the estate tax return.
    • Or you can use a portion of the unified credit, which if you pass in 2012 and use $17,000, your estate has $5.103 million left of the estate exemption remaining.

In light of the ever changing legacy tax laws, Piwonka, CPA, Inc. suggests the following:

  • Continue to use estate saving vehicles, such as revocable and irrevocable trusts in order to safe guard assets and to minimize taxes.
  • Talk to a legacy planner prior to making any gift that maybe subject to gift taxes.

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