Kansas & Missouri Estate Planning

Credit Shelter Trusts – The Tried And True Estate Planning Tool In Overland Park, KS

There are some estate planning tools that are just basic and vital, regardless of tax law changes. Unfortunately, some of these tools may be ignored by taxpayers (to their peril) in Overland Park and elsewhere, when they appear to be eclipsed by changes in the tax laws.

For the prudent taxpayers, however, old tried-and-true estate planning tools like the credit shelter trust should be not be swept aside.

Before the advent of portability as a method to maximize the full estate tax exemption available to married couples, such couples oftentimes would get caught in a marital deduction trap. In other words, the first spouse to die could pass all their wealth to the surviving spouse without triggering estate taxes, but upon the death of the surviving spouse only one spousal exemption (i.e., that of the surviving spouse) would be available to reduce estate taxes on the combined estate of the couple.

Under the right circumstances (and there were many), this was a recipe for disaster.

Enter the credit shelter trust, also known as a "bypass trust," was a proven means to avoid that marital deduction trap. Nevertheless, recent changes to the federal estate tax laws now allow a decedent spouse to pass their assets and their estate tax exemption to their surviving spouse. This portability of the estate tax exemption can now give a married couple the power to shelter as much as $10.5 million tax-free.

So, no need for those credit shelter trusts? Not so fast! As addressed in a recent post in Elder Law Answers titled simply “Credit Shelter Trusts,” there is still plenty of life left in the this traditional estate tax planning approach.

For starters, many states still have their own independent estate taxes at much lower levels than the $5.25 million level exempted per spouse under the federal estate tax exemption. More importantly, portability does not apply to such taxes. In addition, credit shelter trusts not only shelter assets from estate taxes, but they can protect an inheritance from the unsuccessful remarriage of the surviving spouse and provide general inheritance protection.

While there are myriad trust arrangements available to help you achieve your specific estate planning goals, the basic credit shelter trust is a tool that should be considered while planning the estate of every married couple.

Remember: When making your financial, tax and estate plans, don't go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS, and to download free tools to help you organize your estate, visit my estate planning website.

Reference: Elder Law Answers (updated: April 18, 2013) “Credit Shelter Trusts”

The “Permanence” Of Portability In Overland Park, KS

There may be battles aplenty over the budget, and many more to come. At least we have a set of solid laws set in stone under the recently passed American Taxpayer Relief Act of 2012 (ATRA), right?

While it appears safe to breathe a bit easier, many people still don’t trust any tax law claimed to be “permanent” by Congress and the White House.

When it comes to making estate plans certainty is an essential. Any uncertainty can wreak havoc on even the most carefully crafted plans in Overland Park and elsewhere. One popular “permanent” part of estate planning under ATRA is “portability.” Is it here to stay and can we trust it?

“Portability”, as you may well know, is the new ability of a spouse to pass their unused unified gift tax lifetime exemption and/or estate tax exemption onto their surviving spouse. It grew out of budget deals and then was made “permanent” under ATRA (also known as the "bridge over the Fiscal Cliff").

As a questioner in a recent Wall Street Journal Q&A (“Is Estate-Tax Portability Permanent?”) pointed out, estate tax “portability” is a great option... but an act of Congress could just as easily undo it. What then?

The general consensus is that portability is probably here to stay and for a multitude of reasons. Assuming that remains true, the key to portability is to separate myth from reality. The myth: portability is not automatic? The reality: it can be rather complex, especially in terms of unintended consequences. For example, what happens when the surviving spouse remarries?

For the time being, perhaps you can breathe easier as to portability. The larger question, however, is what do you and your spouse hope to achieve through your estate plan from both tax and non-tax perspectives? Never let the tax tail wag the estate planning dog!

Remember: When making your financial, tax and estate plans, don't go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS, and to download free tools to help you organize your estate, visit my estate planning website.

Reference: The Wall Street Journal (March 31, 2013) “Is Estate-Tax Portability Permanent?”

"Portability" And The Estate Tax Exemption

Sometimes it’s just nice to celebrate that good news is still good news. One positive of the Fiscal Cliff deal, ATRA 2012, is the continuation of certain estate and gift tax laws.

A recent Forbes article titled "A Married Couple's Guide To Estate Planning," explores some important considerations when it comes to fundamental estate planning.

As so many of us hoped it would, the fiscal cliff-bridging budget extended the provision known as "portability." As you may know, portability is the ability to pack up the unused tax exemption of the first spouse to pass – that is, their gift/estate tax exemption – and pass it on to the surviving spouse. The surviving spouse doesn't have to worry quite as much about triggering the estate tax when they pass. Why? Because they now have everything they own plus everything their spouse left them and all of it can be sheltered from estate taxes by the estate tax exemptions of both spouses.

The original article has more to say regarding how to secure this portability. It certainly is not automatic! For that matter, portability is also a limited achievement, and a limited kind of protection between married persons.

When all things are considered, you would be well-advised to consult with your estate planning attorneys. There is more to "portability" and proper estate planning than meets the eye.

Reference: Forbes (January 9, 2013) "A Married Couple's Guide To Estate Planning"

The Fiscal Cliff - Will Portability Survive The Fall?

You may be surprised to hear that, on occasion, Congress will agree on something.  Confused by the notion? The media likes to paint a different picture, and in many cases they are spot-on that Congress is up-in-arms about the law. This includes the so-called "portability" of the estate tax exemption between spouses.

So, what do pundits in the know think about the future of portability?

The Wall Street Journal recently offered its take on the matter in an article titled "Estate-Tax 'Portability' [is] Likely to Stay." [Background: as regular readers know, the concept of portability came out of budget deals two years ago and is one more provision set to expire as part of the so-called "fiscal cliff."]

Portability allows married partners, who already enjoy the right to exchange wealth between themselves tax-free at the passing of the first, to pass on their unified estate/gift tax exemptions along, too.  Without portability, a surviving spouse may be required to pay estate taxes on the couple's combined estate value, if the first spouse to die did not properly apply their exemption through traditional estate planning techniques. 

A marital trust was the usual strategy employed to break this vicious predicament. Under current law, though, the exemption is now portable (as long as the estate tax return is filed on the passing of the first to die); so the surviving spouse can apply both exemptions to the final estate.

It's a powerful strategy. Under current law, this means that a surviving spouse can pass a whopping $10.2 million in estate value to their heirs, estate-tax-free.

The end of the year could bring about the expiration of both the generous estate tax exemption and portability itself. Though experts predict that portability is here to stay, no one really knows what Congress will decide.

And, after all, the future can be a tricky thing to predict anyway.

Stay tuned.

Reference: The Wall Street Journal (November 4, 2012) "Estate-Tax 'Portability' Likely to Stay"

Estate Tax Return Required For Portability

Warning: Don’t lose the value of your spouse’s estate tax exemption by failing to file an estate tax return!

Recently, the IRS issued new guidance on this important estate tax issue for married couples regarding the portability of individual estate tax exemption between spouses.

Each individual is allowed to exempt a certain amount of asset value from estate taxation at death, currently $5.12 million. Portability is a new concept, introduced in 2012, to make it easier for a surviving spouse to utilize both their own exemption and that of their deceased spouse.

Like most IRS regulations, however, there are important dance steps to follow in order to achieve the desired result. An estate tax return must be filed soon after the first spouse's death, usually within nine months. If you miss this filing, you likely will lose the value of the first spouse’s exemption. This means the surviving spouse could only shelter about $5 million of estate assets from taxation, instead of the $10.24 million value of the couple's combined exemptions.

You can read more about portability and the various estate tax consequences in a recent Wall Street Journal article, "Avoiding Estate-Tax Traps."

Even if your estate assets are far below the exemption amount, preserving both spouses’ estate tax exemptions is an important aspect of one’s comprehensive estate plan. Remember, we never know what twists and turns our lives may take, and a small estate today could grow through any number of possible circumstances over time.

Reference: The Wall Street Journal (August 7, 2012) "Avoiding Estate-Tax Traps"

IRS Extends “Portability” Filing Deadline for Surviving Spouses

It would be a gross understatement to say that 2010 and 2011 were, undoubtedly, tumultuous years in the world of estate law. While we can't expect anything less from 2012 (that battle simply hasn't occurred yet and likely will be another end-of-year struggle), the "developments" wrangled in 2010 and 2011 are still making news into 2012.

The recent news: The IRS has extended the deadline for the estate tax "portability" election for some surviving spouses. Apparently, the new laws are still largely unknown to the public.

For the surviving spouses of those who died within the first six months of 2011, so long as the decedent's estate was valued at less than $5 million, there is now an extension to file for portability.

Now, even if the executor of such estate didn't file the return within the first 9 months, or even file for a 6 month extension within that time, they have all 15 months to file. However, to comply they need to properly file both the extension Form 4768 and the estate tax form itself, Form 706. Effectively, this means that the first 2011 portability elections become due on Monday, April 2, 2012.

"Portability," as you may be aware, is the new ability for a surviving spouse to pick up and carry along, as it were, the unused estate tax/gift tax exemption of the decedent. For 2011 that meant $5 million, less whatever of that exemption had been used as part of the lifetime gift tax exemption, can be passed along to a spouse who would have a $5 million exemption of their own for a total combined exemption of as much as $10 million.

This is not an automatic ability, however, and so proper and timely filing is essential. It may not seem that important today, especially if $10 million seems like a lot, but it is a simple step to plan for a future you can't foresee (that's why you're planning in the first place, is it not?) and a future where this may make the difference.

Clearly, the IRS wouldn't be offering such extensions if they felt that portability was properly understood and fully utilized; in fact, it likely means that the new laws are not yet understood and so it's worth getting the word out.

Reference: Accounting Today (February 17, 2012) "IRS Extends Deadline on Estate Tax Portability Election"

Estate Planning New Year’s Resolutions

Time has almost expired for 2011. Where did it go? With the new year, you know what that means.

With the exception of a few last minute gifts and end-of-year financial transactions, that usually means relaxing with eggnog and, a bit later, champagne. Of course, it also means that 2012 is about to start ticking and, yes, that's big news.

2012 is going to be a big year for planning. Why? Because the end of 2012 also means the end of the foreseeable future regarding a huge swath of estate planning issues.

Everything we know now about the estate tax, the gift tax, and the other wealth transfer taxes is only set in the tax code until the end of 2012… at least until Congress finishes battling it out and makes a decision about what to do going forward.

In the end, proper planning these days is about taking advantage of what we know about 2012, and hedging our bets about the future thereafter. So what do we know? Smart Money recently provided a brief run-down here:

The estate tax is still set at a $5 million exemption with a 35% rate thereafter but, barring action, it will revert back to a $1 million exemption and a 55% rate! To be precise, the estate tax is actually indexed for inflation and that means it is effectively set at $5.12 million for 2012

The exemption amount for the gift tax is the same as it is for the lifetime gift-tax exemption at the inflation indexed $5.12 million, and in like fashion will snap back in 2013 without any action. This means that it may be the last year ever to take advantage of that unprecedented gifting amount.

Finally, a new and very progressive provision will still be in place for 2012: "portability."

Portability means that a spouse may pass along their unused estate/gift tax exemption to their surviving spouse. That makes the effective total a married couple can pass on without tax a whopping $10 million, or $10.24 once indexed for inflation.

These at least are the basic facts. It may well be that we will see a situation not unlike what occurred in 2010, when the Bush-era laws expired at congressional inaction. Remember that? Taxpayers tried to hold out until 2010 and then tried to hold onto 2010 laws (or lack thereof) until the first moments of 2011.

Will we be holding onto these laws currently in play through 2012 and their generous exemptions, or is 2013 going to be even more advantageous… or treacherous for taxpayers?

Reference: Smart Money (December 13, 2011) "Estate Planning for 2012"

Potential Portability Perils

Note: Wealthy individuals in the U.S. will find it easier to cut their estate-tax bill as a result of a provision for using their deceased spouses’ exemption credit... without traditional Credit Shelter Trust estate planning. However, this (temporary law) may have unintended consequences. In law, as in life, all that glitters may not be gold.

Much ado has been made about the new power in estate planning known as "portability," and for good reason. Nevertheless, it's also prudent never to put all your (estate planning) eggs in one basket. So it is with the matter of estate tax exemption portabilility.

I've written previous blog posts regarding some of those issues, like when the Journal of Financial Planning upheld the credit-shelter trust over "portability", but a recent Bloomberg article gives renewed emphasis and food for thought.

As you likely are aware, "portability" is the newly minted ability for a deceased spouse to transfer their "unused" gift and estate tax exemption amount to their surviving spouse. Provided all the required paperwork is timely filed with the IRS, that effectively allows a married couple to exempt an astounding $10 million from federal taxes for their loved ones without the use of traditional Credit Shelter Trusts or other legal devices.

Bloomberg suggests that it is better to think of portability as a "safety valve" for married couples, especially those whose assets would be entirely covered by the doubled exemption, but not something to be relied upon. The biggest limitation, for one, is that portability exists at the whim of lawmakers. [Always a reckless reliance, by the way.] After the budget showdown last December, the continued existence of portability is only guaranteed until the end of 2012 (if that, Congress being the politically fickle animal that it is).

But there is another important caveat Bloomberg touches upon that is worth mentioning. Portability is a power that exists between spouses, but in a world of shifting marriages, divorces, and remarriages that also creates some rather strange limitations. Portability only applies to the "last deceased" spouse. In other words, if a widow remarries, then they could potentially lose that massive exemption (even after their own estate has doubled, thereby creating an estate tax liability). Indeed, if portability isn't lost and if the widow's new spouse predeceases after using their own exemption by gifting, then the widow's estate is in the same tricky situation. Whew!

Portability is a wonderful tool to consider, but clearly, too, it is a difficult one with which to make long-term estate tax plans. More information and ideas about trusts can be found in those articles, and of course the best resource is your own legal counsel.

Reference: Bloomberg (August 16, 2011) "Wealthy Take Estate-Tax Exemptions Beyond Grave Until 2013"