'Permanence' of estate taxes helps planners

Jan 6, 2013 @ 12:01 am

By Andrew Osterland

U.S. Capitol
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U.S. Capitol (Bloomberg)

Sometimes it pays to procrastinate.

Last year, estate planners and financial advisers were urging their wealthy clients to take advantage of the favorable and possibly fleeting opportunity to give money or assets to family and charities on a tax-free basis. They figured that the $5.12 million estate tax exemption was headed for the dustbin, reverting to the $1 million level of 2002.

Estates or gifts over that amount would also be taxed at a 55% rate, versus the 35% rate in place last year.

It turns out that the mad rush at year end to take advantage of the opportunity was all for naught. Congress essentially extended all the existing tax rules for estates, gifts and generation-skipping wealth transfers, with the one notable change of bumping the tax rate up to 40%.

Those who either resisted the advice to set up expensive trusts to manage the gifts, or simply dawdled about doing it, can now take their time with the decision.

“[The outcome] probably annoyed a lot of people who were running around at year-end,” said Barry Picker, a partner with Picker & Auerbach, an accounting firm that does financial and estate planning. “I think a lot of people may be ripping up trust documents this year if they have any regrets.”

The estate and gift tax elements of the fiscal cliff deal essentially extend the very favorable rules in place over the past two years. The $5 million exemption (adjusted for inflation) was left untouched, as were the rules on portability of the exemption for married couples. Surviving spouses can continue to claim the unused portion of their husband's or wife's exemption.

The gift and estate tax rules also remain unified — any combination of estate asset transfers and gifts made during a person's lifetime below the exemption threshold won't be taxed. Although the tax rate increased to 40%, that's still far lower than rates during most of the last decade.

“It's not perfect, but the permanency of it is a huge positive,” said Carol Kroch, head of wealth and financial planning for The Wilmington Trust Co.

Indeed, the best thing about the deal is the certainty of it. “It's going to allow us to do our planning with clients in a more measured, thoughtful manner,” said Ronnie Davidowitz, head of the New York trusts and estates practice at law firm Katten Muchin Rosenman.

Charles Aulino, director of financial planning for Glenmede, added: “There's been no solid basis for estate planning since 2000. [Congress] can always change things, but this looks like a long-term — if not permanent — set of rules.”

The immediate impact of the deal is likely to be that fewer people set up trusts. For those with assets around $5 million ($10 million for couples), the large exemption threshold — along with the portability rules — may be enough to allow them to transfer assets to descendants on a stepped-up cost basis at death.

Their beneficiaries wouldn't face large capital gains taxes on real estate and other assets that they would if they received them as a gift. The recipients of asset gifts assume the cost basis of the donor for tax purposes, whereas heirs can increase the cost basis of the assets to fair market value.

In the long run, however, the use of trusts to manage estates should continue to be popular, planners said, in part because people now are more aware of what they can do.


“Setting up a trust isn't just about dollars and cents. It's a planning device to better manage assets,” Ms. Kroch said.

Trusts also can be used to remove assets from the estate that are likely to appreciate in value and lead to higher estate taxes down the road.

Transferring assets during a person's lifetime also can save a lot on state estate taxes. Connecticut is the only state that levies a tax on gifts.

Mr. Aulino thinks the interest in trusts may diminish in the short term but not over the long term.

For one thing, the fiscal cliff fear of claw-backs by the government — making retroactive any reductions in the size of exemptions in 2013 — kept many clients from making large gifts last year. The deal out of Washington should put those fears to rest, Mr. Aulino said.

“I think we'll eventually see more use of these trusts,” he said. “With the estate tax rate up to 40%, it makes as much — if not more — sense now.”

aosterland@investmentnews.com Twitter: @aoreport


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