HOT TOPICS IN ESTATE PLANNING-2013
I. The American Taxpayer Relief Act of 2012 and the “end” of the Bush era tax cuts.
On January 1, 2013, the Bush era tax cuts expired. The Bush era tax cuts were various tax code changes that had been enacted during the George Bush’s presidency. Originally scheduled to expire at the end of 2010, the tax cuts were extended for two more years until the end of 2012. The expiration of the tax cuts, among other things, was supposed to cause the US to go over the “fiscal cliff”. However, on January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012, which reinstated many of the tax cuts, effective retroactively to January 1st.
The enactment of the American Taxpayer Relief Act of 2012 affected various tax provisions related to income taxes, transfer taxes, IRAs, and pensions. When reviewing the Act’s effect on gift and estate taxes, one sees that there was not dramatic change from the immediately prior year. However, there is good news in that the passage of the Act prevented severe tax rates from being implemented.
A. Estate Tax. The American Taxpayer Relief Act set the maximum federal estate tax rate at 40%. The Act also includes a $5 million dollar estate tax exclusion which is adjusted for inflation. Immediately before the Act, the maximum estate tax rate was set at 35% with a $5 million inflation adjusted exclusion. Had the Act not been passed, the top estate tax rate would have been 55% with an exclusion amount of only $1 million, indexed for inflation. The practical effects of the Act are significant. If the Act had not been passed, a person dying with a $2 million taxable estate could potentially have to pay over a $1 million in estate taxes on the estate.
The American Taxpayer Relief Act also provides for “portability” between spouses. In other words, the estate of the first to die spouse may make a portability election to permit the surviving spouse to use the first to die spouse’s unused estate tax exclusion amount on the surviving spouse’s estate. The practical effect of this is to increase the surviving spouse’s estate’s exclusion amount to potentially $10 million. Without enactment of the Act, portability would not be available. This could be problematic for those couples near the threshold of the estate tax exclusion in that while individually, neither of their estates was large enough to trigger taxes, but when coupled together, the value of the estate would cross the tax threshold. Thus, when the first spouse dies and leaves everything to the other spouse, the other spouse’s estate would potentially have to pay taxes on the accumulated estate.
B. Gift Tax. Similar to its effect on the estate tax, the American Taxpayer Relief Act set the maximum federal gift tax rate at 40%. The Act also includes a $5 million dollar lifetime gift tax exclusion which is adjusted for inflation. Thus, a person still may gift up to $5 million (or more) tax free during his lifetime.
C. Generation Skipping Transfer Tax. The American Taxpayer Relief Act set the maximum federal generation skipping transfer tax rate at 40%. The Act also includes a $5 million dollar lifetime generation skipping transfer tax exclusion which is adjusted for inflation. The generation skipping transfer tax usually applies when a person makes a gift to a grandchild (or to someone 37.5 years younger than the gift-giver). Thus, a person still may gift, either during life or at death, up to $5 million (or more) tax free to his grandchildren (or to anyone 37.5 years younger than he is).
Overall, the American Taxpayer Relief Act essentially preserved the recent status quo. Although the top estate and gift tax rate increased, the increase was not as great as it could have been. Furthermore, the estate and gift tax exclusion remains at a generous $5 million. Most individuals may rest easy knowing they will be able to pass their wealth onto younger generations tax free.
II. Disposition of Digital Assets.
Considering that more and more people are online, the question of what to do with digital accounts and assets is becoming a bigger issue in the estate planning process. Digital accounts and assets generally include various intangible assets such as email accounts, domain names, social networking sites like Facebook, Twitter and LinkedIn, and electronic bank and investment accounts.
At least one major issue in estate planning for digital assets is the question of “account vs. asset” and the issue of ownership. Money in an online bank account is an asset and ownership of that asset is straightforward. However, ownership of other digital accounts is questionable. Often, a person merely agrees to “terms of use.” That person alone may use the online account. However, the accounts may not be transferable to others. The account holder does not necessarily have complete and unrestricted ownership. Thus, when a person dies, the terms of use agreement will govern.
Initially, the process of including one’s digital footprint in the estate plan is to manage the accounts and assets. This should include identifying the accounts and assets. If possible, categorize them as, for example, personal, business, financial or otherwise. Next, a list should be made of all the accounts and assets, their category, the passwords and usernames, account numbers, etc. The list should be kept in a safe location such as a safe-deposit box. The list should be shared with whoever is appointed fiduciary of your estate.
As for the fiduciary, he or she must notify the account provider of the decedent’s death. Furthermore the fiduciary should manage and change passwords to those that the fiduciary can control. The fiduciary should keep the accounts open for some time to make sure all relevant or valuable information has been saved and all vendors or other business contacts have been appropriately notified, and so all payables can be paid and accounts receivable have been collected. The accounts should be closed when reasonably possible and the information archived for the applicable statute of limitations period
III. Planning for Incapacity and Disability.
Estate planning attorneys will almost always go over issues of planning for incapacity and disability with their clients when conducting overall estate planning. The issue of management of one’s estate and of one’s health and personal care is an important issue and should be addressed well ahead of time – that is, before one becomes incapacitated or disabled and it’s too late. However, the concern of incapacity and disability planning is as great a concern as ever.
The fact is that everyone’s health will fail eventually, their mental acuity will decline, and their ability to function and manage their day to day lives will falter. Furthermore, chances are that an individual will become disabled prior to death. With advances in healthcare and medicine, that individual may be kept alive for some period of time in his or her incapacitated state. The management of the person’s estate and healthcare decisions will fall onto others.
Incapacitated individuals will need someone to handle the business of their lives such as paying bills, managing investments or making key financial decisions. They also will need someone to oversee their healthcare and make important medical decisions for them.
The key here, as in all estate planning, is to plan ahead. Documents such as powers of attorney, living wills, and advanced healthcare directives can lay out one’s guidelines and directives regarding who will be their fiduciary and representative, and who will make decisions on their behalf once they become incapacitated. These documents can also proscribe treatments and medical procedures an individual wishes to be performed in the event he is incapacitated. Perhaps such individual wants all life-saving treatments withdrawn when terminally ill and in a no-code situation. A living will would be the proper mechanism to state such desires. It is important to address one’s management of money and personal care, in addition to the collection and disposition of one’s assets, when planning an estate. Once an individual is incapacitated, it may be too late to do so.
IV. Repeal of DOMA.
When the U.S. Supreme Court recently struck down the federal Defense of Marriage Act (DOMA) in United States v. Windsor, gay married couples became entitled to the same benefits under federal law that heterosexual couples enjoyed. The decision opens up new estate planning benefits and considerations to gay spouses that previously did not exist.
For example, the estate, gift and GST tax provisions discussed in Part I. above now apply to legally married gay couples. Thus, gay couples will be able to enjoy portability between their estates and will be able to enjoy the marital deduction thereby allowing them to gift any amount of money to each other tax free. Furthermore, the surviving spouse in a gay marriage may be entitled to receive social security benefits when the first spouse dies.
It is important that legally married gay couples contact their estate planning attorneys to review their estate plan in light of the potential gift, estate and tax planning ramifications of the Supreme Court’s recent decision.
