Kitces | Nerd's Eye View - Estate Planning

The Rise Of The Spousal Lifetime Access Trust (SLAT)

nospam@example.com (Michael Kitces) — Wed, 22 May 2013 06:06:00 -0500

In late 2012, a new estate planning strategy emerged - the so-called "Spousal Lifetime Access Trust" (or SLAT for short). The basic concept of the SLAT was relatively straightforward: it would function like a bypass trust, but be funded during life instead of at death, with the intention of using it to take advantage of the then-current $5.12M estate tax exemption before it dropped back to $1M as was scheduled for 2013.

Ultimately, the estate tax fiscal cliff didn't happen, but the SLAT remains valid in 2013 and beyond for a new purpose: planning around state estate taxes, and the mismatch between the numerous states that have only a $1M state estate tax exemption and no gift tax, while the Federal gift and estate tax exemptions are at $5.25M. Given this "decoupling" of the state estate tax from its Federal gift tax - and the lack of any state gift tax backstop - couples have a unique opportunity to manage or avoid state estate taxes by creating "supercharged bypass trusts" in the form of SLATs funded during life.

The caveat to the strategy is the "reciprocal trust" doctrine, which can cause SLATs to become "uncrossed" and taxable in the original donor's estate. Fortunately, reciprocal trust treatment can be avoided. Unfortunately, though, the rules to avoid reciprocal trust treatment are based on the facts and circumstances of the situation, and consequently a focus for the IRS and estate planning attorneys in the coming years may be figuring out how best to avoid the reciprocal trust doctrine without actually ruining the client's financial and estate planning goals.

Nonetheless, though, the reality remains that the SLAT may be increasingly popular in the coming years, at least until states implement a gift tax, recouple to the Federal gift and estate tax system, or just repeal their state estate taxes entirely.

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Permanent Portability Of The Estate Tax Exemption - Is It Time To Bypass The Bypass Trust For Good?

nospam@example.com (Michael Kitces) — Wed, 16 Jan 2013 06:01:00 -0600

As a part of the resolution to the fiscal cliff, the American Taxpayer Relief Act of 2012 (ATRA) extended and made permanent a number of important tax code provisions that impact estate planning, including the now-$5.25 million estate tax exemption (after inflation indexing), and the portability of a deceased spouse's unused exclusion amount (DSUEA) to carry over some or all of that $5.25 million to a surviving spouse. The end result of these changes: married couples can shelter as much as $10.5M of net worth from the estate tax system simply by doing nothing more than leaving everything to a surviving spouse with a simple Will and filing an estate tax return.

The ramifications of these changes will significantly impact estate planning for years to come, as the higher exemption drastically reduces how many people will be subject to the estate tax in the future, and portability in particular renders the use of bypass trusts largely irrelevant. In fact, bypass trusts actually become an adverse strategy for many, given both the direct cash costs of trust drafting and administration, and the indirect income tax consequences like compressed trust income tax brackets and the loss of any step-up in basis at death.

While bypass trusts will still remain relevant in some situations, from their usefulness to shelter future growth from taxation for very high net worth couples and to preserve the GST exemption (which is not portable), to their utility for state estate tax planning. In addition, use of trusts in general will remain relevant for many non-tax reasons, especially asset, divorce, and spendthrift protection. Nonetheless, the bottom line is that with the new rules, esecpially portability of the estate tax exemption, it may be time to bypass the bypass trust for the overwhelming majority of Americans!

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Rising Pressure To Complete End Of Year Exemption Gifting Strategies

nospam@example.com (Michael Kitces) — Wed, 17 Oct 2012 06:05:00 -0500

As the end of 2012 approaches, so too does the end of our current gift and estate tax exemptions and rates - with the so-called "fiscal cliff" the estate tax exemption is scheduled to fall precipitously in 2013, while the maximum estate tax rate rises. As a result, many high net worth clients have been encouraged to consider gifting away significant sums of money this year - to take advantage of the current exemption - before it lapses. And as with most gifting strategies, often the least effective means is to simply gift cash; instead, popular strategies include using a Family Limited Partnership (FLP) to obtain a valuation discount for the assets being gifted, or alternatively to gift the money to an Intentionally Defective Grantor Trust (IDGT) and use it as seed money to buy even more assets out of the estate. Unfortunately, though, there are many important caveats, including the risk of an estate tax clawback, the affordability of the gift itself, and coordination with state estate tax laws. Nonetheless, with the estate tax exemption amount scheduled to drop more than 80% in just a few months, the pressure is on for many clients to make a decision about whether they will engage in an end-of-year gifting strategy or not - or at least, prepare so that they can complete such a gift once the outcome of the election is known!
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Will Same-Sex Couples Soon Be Eligible For Federal Tax Treatment As A Married Couple?

nospam@example.com (Michael Kitces) — Tue, 31 Jul 2012 06:00:00 -0500

Under the Defense of Marriage Act (DOMA), the Federal tax law only affords treatment to married couples when the marriage is between a man and a woman, and denies marital treatment for same-sex couples, regardless of whether the couple is recognized as married under state law. However, in the recent Windsor v. United States court case, a New York District Court declared the applicable Section 3 of DOMA to be unconstitutional, and ruled that a same-sex couple should be eligible for the marital deduction for Federal estate taxes, resulting in a $363,000 estate tax refund. The case will likely end up in the Supreme Court, and in fact appears to be on the fast track to get there soon. If DOMA is ultimately declared unconstitutional, it will result in a dramatic shift in planning for same-sex couples, opening the door for marital treatment for estate tax marital deduction, intra-couple gifts, and numerous income tax deductions, credits, and other benefits afforded to married couples. At this point, DOMA is still the law of the land, but same-sex couples may wish to begin filing protective refund claims in case DOMA is ultimately struck down in the coming year.
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3 Estate Planning Strategies That May Die Soon

nospam@example.com (Michael Kitces) — Wed, 04 Jul 2012 06:10:00 -0500

As Congress and the White House continue to search for revenue to close the gap on the US fiscal deficit, numerous estate planning strategies - especially for high net worth clients - are coming under attack. Recent legislative or budget proposals have threatened the use of both Grantor Retained Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs), both popular strategies to "freeze" the value of hopefully-rapidly-appreciating assets for transfer to the next generation. In addition, the new rules on portability - currently temporary, but likely to become permanent at some point in the future - threaten the even more popular and common estate planning strategy, the bypass trust. While the exact timing for when these new rules become permanent law, the reality is that change appears to be coming. As a result, some clients may wish to accelerate the implementation of strategies before the laws change... while others may prefer a wait-and-see approach before deciding what estate planning strategies to implement at all!
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Treasury Releases Proposed Regulations For Portability Of Estate Tax Exemption

nospam@example.com (Michael Kitces) — Tue, 26 Jun 2012 06:01:00 -0500

Since the beginning of 2011, clients who pass away and leave their assets to their spouse have been able to bequeath not only their property, but also their unused estate tax exemption. As a result, bypass trusts are no longer necessary to preserve the estate tax exemption of the first spouse to die. Unfortunately, though, the portability of the estate tax exemption is only temporary, and is scheduled to expire at the end of the year. Recently, though, the Treasury put forth Proposed and Temporary Regulations, intended to clear up some areas of confusion around portability, and invite public comments to further press towards Final Regulations. While the regulations bring some welcome clarification - and a few positive changes for planners as well - the fact that the Treasury went through the trouble of working on regulations also suggests that they, too, expect portability to ultimately become permanent. While most planners aren't counting on the change yet, the new regulations do provide a good opportunity to better understand the details of portability and how it may play out in the future.
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President's Budget Proposals Take Aim At Popular IDGT Estate Planning Strategy

nospam@example.com (Michael Kitces) — Tue, 29 May 2012 06:01:00 -0500

As the country continues to struggle with its fiscal woes, Congress and the White House are increasingly proposing tax law changes intended to cut down on perceived "abuses" and "tax loopholes" - especially those used by the wealthy. The latest, in the President's Fiscal Year 2013 budget, is a proposal to change to the estate tax laws, requiring any grantor trust to be included in the estate of the grantor (or pay gift taxes if the grantor trust assets are distributed before the grantor's death). The proposal would kill the popular Intentionally Defective Grantor Trust (IDGT) estate planning strategy, which works specifically by relying on the fact that a trust can be a grantor trust for income tax purposes even while being excluded from the grantor's estate for estate tax purposes - after all, if the grantor trust is automatically included in the grantor's estate, there's no longer any value to make gifts or sales of property to an IDGT. While the rules are only proposed at this point - and would only apply to trusts created in the future, after the enactment date of any legislation - the fact that the change was proposed at all suggests that the days of IDGT planning strategies may be numbered.
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Planning Around Estate Tax Impermanence - Decisive Action Or Tentative Flexibility?

nospam@example.com (Michael Kitces) — Tue, 10 Apr 2012 07:28:00 -0500

In 2012, planners and clients once again face the proposition of the estate tax 'sunset' that next year may revert the estate tax exemption and rate back to their 2001 levels. This impermanence in the current rules, with a scheduled lapse to a less favorable environment, creates an opportunity for clients to take decisive action while the current rules hold. Yet at the same time, if Congress ultimately does extend the current rules, decisive action may simply lead to irrevocable transfers that prove to be unnecessary, but cannot be unwound after the fact - a potential hardship for all but the wealthiest of ultra high net worth clients. And the reality is that there is little historical precedent for Congress to actually decrease the estate tax exemption or increase the estate tax rate - such a shift hasn't occurred since World War II! Accordingly, some planners have begun to lean in the opposite direction - viewing the current environment not as one for decisive action, but one for tentative flexibility and a wait-and-see approach.
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How Soon Will States Close Their Estate Tax Loopholes?

nospam@example.com (Michael Kitces) — Thu, 19 Jan 2012 08:32:50 -0600

The implementation of the Economic Growth and Tax Relief Reconciliation Act of 2001, which both increased the Federal estate tax exemption and more importantly eliminated the state estate tax credit, started the process of "decoupling" between the Federal estate tax and various states. As the years moved forward, many states retained a $1 million estate tax exemption amount, decoupling their exemption from the Federal amount that has ultimately risen to its current $5 million level. However, the reality is that a second decoupling just occurred in 2011 - the decoupling of state estate tax exemptions from the Federal gift tax exemption. As a result, a new state estate tax planning "loophole" has opened up, creating a planning opportunity for many clients... but only until the states close the loophole.
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Legislative Uncertainty Creates New Problems For Estate Planning Gifting Strategies

nospam@example.com (Michael Kitces) — Tue, 24 May 2011 12:06:38 -0500

Lifetime gifting is a widely accepted technique for managing potential exposure to future estate taxation. The purpose of the strategy is not just the obvious "if I give it away while I'm alive, I can't be taxed on it when I die" - due to the fact that both gifting and estate taxation share the same single lifetime exemption amount that is protected from taxation. Nonetheless, gifting can still be highly effective, because once the asset is transferred, all future appreciation is in the hands of the donee, and not the donor; as a result, the value of the asset is "frozen" at its value on the date of gift in terms of its cumulative gift and estate tax impact. And with the gift tax exemption recently increased to $5 million - and only until the end of 2012, after which it is scheduled to lapse back to $1 million - many estate planners are counseling clients to make some big gifts while they can. There's just one problem: it's not clear whether a future reduction in the gift and estate tax exemption could indirectly cause a so-called "recapture tax" on prior gifts.
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Charitable Contributions from IRAs are Back! And Overhyped! And Still an Inferior Gifting Strategy!

nospam@example.com (Michael Kitces) — Wed, 29 Dec 2010 10:03:08 -0600

Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (or the "Tax Relief Act" for short!) signed into law by President Obama on December 17th, taxpayers over age 70 1/2 may once again make up to $100,000 per year of so-called "qualified charitable distributions" out of their IRAs and directly to a charity, for the 2010 and 2011 tax years. Doing so allows the entire amount of the distribution to be excluded from income, effectively ensuring that those IRA dollars are never taxed, while also satisfying charitable goals. Unfortunately, the problem is that this is actually a remarkably INefficient way to make significant charitable gifts, compared to other alternatives available under the tax law!

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Is It Time To Bypass The Bypass Trust? Estate Planning in 2011...

nospam@example.com (Michael Kitces) — Tue, 21 Dec 2010 10:24:25 -0600

Planning around estate taxes by using a Bypass Trust is a "basic" strategy that has been around for decades. In fact, for many clients, it was a major impetus to get their estate planning done in the first place - if your estate was above a certain threshold and you didn't get estate documents that would put a proper Bypass Trust in place, it could cost your beneficiaries hundreds of thousands of dollars. Yet with the new provisions of the tax legislation signed into law last week by President Obama, Bypass Trusts will no longer be necessary for many clients to maximize the use of a couple's estate tax exemptions - which means it may be time to bypass the Bypass Trust planning strategy.

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Negative buzz about Vanguard's IRA beneficiary rules

nospam@example.com (Michael Kitces) — Mon, 18 Aug 2008 09:42:31 -0500

Do your clients have retirement accounts held directly with Vanguard? More than one? Do you know who the beneficiaries are for each account? Are you SURE you have that right? Sorry, think again.

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