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Birmingham Bar Association Bulletin Fall 2015

Trusts & Estates Kay Wilburn and Kevin Webb, Dominick Feld Hyde, P.C. Important Information For Your Estate Planning Clients The current estate and gift tax laws became effective in 2013 giving taxpayers a $5,120,000 estate tax exemption per person (indexed for inflation). The 2015 estate tax exemption amount is $5,430,000 per person.  In addition to an increase in the exemption amount, the current law also includes a new concept referred to as “portability” whereby a married couple can combine their exemptions—the surviving spouse can “inherit” the unused exemption of a deceased spouse (if certain tax elections are made by filing a complete and correct estate tax return on time). The primary effect of these changes is that most families do not have to worry about paying estate taxes, and they can simply organize their estate plans in a manner that accomplishes their family objectives without the requirement of creating an estate tax exempt trust (often referred to as a “credit shelter” trust) upon the death of the first spouse to die. Of course, there are important nontax benefits of trusts for the surviving spouse (and descendants).  However, the tax planning appropriate prior to 2013, which commonly created estate tax exempt trusts for the surviving spouse, was to utilize the estate tax exemption of the first spouse to die so there would be less of the couple’s assets subject to estate tax upon the death of the second spouse. While this is prudent planning to minimize estate taxes, the heirs of clients who no longer require this type of estate tax planning will potentially incur additional income taxes due to the lack of an income tax basis increase (“step-up in basis”) upon the death “...potentially incur additional income taxes due to the lack of an income tax basis increase...” of the surviving spouse for the assets in the estate tax exempt trust. Consider the following example: H dies in 2015 leaving a surviving spouse, W, and their son, S. At the time of his death, H owned real property worth $1,000,000 and a brokerage account of $2,500,000. H’s Will (drafted in 2009) provides that the residue of his estate (up to the estate tax-free amount) is to be transferred to a testamentary trust for the benefit of W for the rest of her life. Anything over the estate tax-free amount is to be transferred outright to W.  Because the estate tax exemption in 2015 is $5,430,000, H’s entire estate is transferred to the “estate tax exempt” trust for W. Per its terms, the trust continues for W’s lifetime providing for her health, maintenance and support.  Although W has received all of the net income of the trust, she has not needed to invade much, if any, of the principal. At the time of W’s death in 2025, the trust has grown in value to $4,500,000 through appreciation of both the real property and the securities in the brokerage account. The trust directs that the assets of the trust are to be distributed to S upon W’s death.  S receives the trust property and decides to sell the assets to start a new business.  Unfortunately, the income tax basis of the trust assets remains the same as it was at H’s death – there is no additional step-up in tax basis upon the death of W. The result is that S is subject to capital gains tax on the $1,000,000 of appreciation in the value of the trust assets. If H and W had properly updated their estate plan with a more flexible tax structure, not only would there be no estate taxes, S could have sold the assets and avoided the entire income tax burden as well!  There are useful approaches that provide flexibility in minimizing, or even totally avoiding, both estate and income taxes under current tax laws.  Perhaps now more than ever, practitioners should be working with their clients to update their plans to incorporate both estate and income tax planning, as well as asset protection measures, in their estate plans. G 26 Birmingham Bar Association


Birmingham Bar Association Bulletin Fall 2015
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