January 3, 2013 – Planning for Portability and $5,250,000 Exemption
There are 23 days left before the Gasparilla Pirate Festival in Tampa, Florida on Saturday, January 26, 2013!
THANK YOU CONGRESS, THANK YOU MR. PRESIDENT FOR A $5,250,000 GIFTING/ESTATE TAX/GST EXEMPTION ALLOWANCE, PLUS INFLATION!
PLANNING FOR PORTABILITY – TAKING ADVANTAGE OF AN UNUSED EXCLUSION OF A FIRST DYING SPOUSE
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THANK YOU CONGRESS, THANK YOUMR. PRESIDENT FOR A $5,250,000 GIFTING/ESTATE TAX/GST EXEMPTION ALLOWANCE, PLUS INFLATION!
Congress gave us a late Christmas/Hanukkah gift – a permanent continuation of the $5,000,000 exclusion, and continued unification of the exclusion for estate, gift, and generation-skipping tax purposes, with a forty percent (40%) “flat rate” for taxable gifts or estates. Our chart showing previous and present estate tax law rates and exclusion amounts can be viewed by clicking here.
We had expected the gift tax exemption to go down to $1,000,000, and were very pleased that this was not the case.
Last night democratic leadership on various talk shows indicated that more tax increases would be in store as part of any process that involves spending reductions. Clients who entered into large gift transactions in 2012 have certainty as to the ability to discount and defective grantor trust status where these were used. They may not be available for all of 2013. Typically tax laws become applicable on the day that a proposed bill is released from the House Ways and Means Committee. It is difficult to predict when that might happen.
A good many clients made gifts of LLC and/or partnership interests that would be worth as much as $5,120,000 if no discounts were permitted. With discounts, these clients will be able to safely make further significant gifts in 2016 after the three (3) year audit statute runs on gift tax returns.
In addition, the legislation left portability intact, so Wills executed by spouses who want to help each other should include special language that we will be glad to share upon request.
Now we have to put our income tax planning hats on to prepare for what seemed almost impossible a few months ago. We have a combined income and Medicare tax rate of 43.4% for high earner taxpayers.
While the threshold for reaching the 39.6% was raised to $450,000 for married couples filing jointly and $400,000 for single taxpayers, the threshold for the 3.8% Medicare tax is still $200,000 for single individuals and $250,000 for married couples filing jointly.
Capital gains tax rates will increase to 20% for those in the highest tax bracket. Qualified dividends will be taxed similar to capital gains income making the effective tax rate for dividends 23.8% for married couples with income over $450,000 and for single filers with income over $400,000 when the Medicare tax is included.
Many high earner taxpayers will likely therefore be re-evaluating their investment decisions with respect to whether taxable bond and bond fund holdings should be converted to municipal bonds or bond fund holdings, and whether stocks or mutual funds that have lower dividends and greater capital gains growth should be considered.
Also, taxpayers with rental activities will be looking at how to make these “active” as opposed to “passive” to attempt to avoid the 3.8% Medicare tax imposed upon passive income. A copy of Chapter 4 from our now somewhat outdated book The Annihilation of Wealth which describes the Medicare tax and real estate investment aspects can be viewed by clicking here.
Our general explanation letter for clients, which will hopefully be helpful to those clients and advisors who have been attempting to understand the new tax law by reading news articles which do not completely describe the new primary structure of tax thresholds and rates can be found by clicking here.
Planning for Portability – Taking Advantage of an Unused Exclusion
The Deceased Spousal Unused Exclusion Amount (DSUEA) is equal to the lesser of (i) the basic exclusion amount ($5,250,000 for 2013) of the last deceased spouse or (ii) the excess of the basic exclusion amount of the last deceased spouse over the gross estate of the deceased spouse on which the estate tax was determined.
The surviving spouse may use the DSUEA of his or her deceased spouse as well as his or her basic exclusion amount to avoid the imposition of estate tax.
However, portability of the deceased spouse’s DSUEA is only available if the Executor of the deceased spouse timely filed an Estate Tax Return and elected for portability to apply. Therefore estates which would not normally be required to file an Estate Tax Return must do so to preserve the unused exemption.
As discussed below this may be problematic for some surviving spouses, especially in second marriage situations.
Once the election is made it is irrevocable. It is important to note that the election can only be made on a timely filed Estate Tax Return (which does include extensions). If the Estate Tax Return is not timely filed, then the Estate will lose the benefit of portability.
One downside of making the election is that the election will keep the statue of limitations for the IRS to review the Estate Tax Return open forever. Typically the IRS only has three years from the date the Estate Tax Return is filed to audit the return. It is important to note, however, that the IRS only can audit the Estate Tax Return to determine the amount of the unused exemption. The IRS will not be able to audit the Estate Tax Return to impose additional tax or liability.
It may still be best practice to use a Credit Shelter Trust on the death of the first spouse rather than relying on portability. If the main assets of the estate are IRAs or other similar qualified plans, then the spouse could be best served by rolling over the assets to postpone the income tax recognition and rely on portability to reduce the eventual estate tax exposure.
Generally, it would be better to establish credit sheltered trusts than to use portability for the following reasons:
1. The amount that is ported will not be indexed for inflation. This is in contrast to the surviving spouse’s estate tax exemption which is indexed for inflation.
2. To take advantage of portability, both spouses must be U.S. citizens and/or residents.
3. The growth in a credit sheltered trust will be exempt from estate tax. Because this will not be subject to estate tax, the better opportunities available to the family can be channeled to the credit shelter trust.
4. The credit shelter trust can require that the surviving spouse serve as a Co-Trustee with a licensed trust company or trusted advisor or individual. This will help to prevent the assets of the credit shelter trust from being mismanaged or from being spent on the pool boy. This protection is not available if portability is elected and the assets are owned by the surviving spouse outright.
5. Generally credit sheltered trusts are protected from the creditors of the surviving spouse, whereas assets left in the surviving spouse’s name may be subject to creditors.
6. The assets of the credit shelter trust can be leveraged by borrowing assets from the surviving spouse at the applicable Federal Rate. These assets can then be invested and assuming the investment return exceeds the applicable Federal Rate, then the assets in the credit shelter trust will continue to increase in value sheltering more wealth from being subject to estate tax. This leverage technique is not available if portability was elected and the assets are in the surviving spouse’s individual name.
7. Portability only applies to the Estate Tax Exemption and Gift Tax Exemption. It does not apply to GST Exemption. So if the surviving spouse dies with a $10,000,000 Applicable Exclusion Amount and wants to maximize the amounts that can benefit children without being taxed at the children’s level, he or she can only leave $5,250,000 to a GST Trust for children and grandchildren, and the remaining $4,750,000 would have to be used on a non-GST basis, and will thus be expected to be taxed at the children’s level.
8. It avoids the expense of filing an Estate Tax Return. It is unclear exactly how much information would need to be included on the Estate Tax Return. Presumably, in most of these estates they would not be subject to estate tax. However, the Executor would need to file the Estate Tax Return with all of the necessary supporting information such as appraisals and other items which will be an expense to the Estate.
Because of this expense and especially in situations where there are multiple families from previous marriages involved, the people or trust companies in charge of the first dying spouse’s estate may be uncooperative about making the election.
9. Many advisors will provide wills or codicils with language that permits the surviving spouse to require the filing of an Estate Tax Return and the election, and may require the surviving spouse to pay the expenses attributable thereto.
Treasury Regs. § 20.6018-2 allows for a special administrator to be appointed under local law to file and sign a federal Estate Tax Return. In a situation where spouses have separate children, the children or advisors of the first dying spouse may prefer to serve as personal representatives and to control all aspects of estate administration, but the surviving spouse can benefit significantly by having the first spouse’s estate file an Estate Tax Return and make a portability election.
Potential document language is as follows:
PORTABILITY WILL LANGUAGE
Portability Estate Tax Allowance Return and Election. I recognize that under the estate tax laws enacted in December 2010, it is possible that on my death the portion of my estate tax exclusion not used by my estate may pass under the “Portability Rules” to my surviving spouse. If my surviving spouse or my surviving spouse’s duly appointed agent or agents request that an estate tax return or other documentation or paperwork be filed and/or that an election be made to facilitate the availability of Deceased Spouse Unused Exclusion Amount (“DSUEA”) to my surviving spouse, then my Personal Representative shall take such actions as are reasonably necessary to make such DSUEA available, provided that my Personal Representative may request reasonable indemnification and reimbursement of expenses from my spouse if my Personal Representative deems this appropriate, in his or her discretion, or that my Personal Representative may alternatively request that a special administrator ad litem be appointed to prepare and execute such return or returns as may be necessary to facilitate this. Further, my Personal Representative may require that my spouse indemnify such Personal Representative and the estate for any liabilities, obligations or expenses incurred as the result of the filing of such return, provided that if an estate tax return was already required to be filed with respect to my estate, then only such additional liabilities, obligations or expenses as are reasonably incurred to facilitate making a portability election may be charged to my spouse.
January’s AFRs Released – An Updated Three Month Chart
Below we have this month, last month’s, and the preceding month’s Applicable Federal Rates, because for a sale you can use the lowest of the three. Please click HERE for the chart.
APPLICABLE FEDERAL RATES
To view a chart of this month, last month’s, and the preceding month’s Applicable Federal Rates, because for a sale you can use the lowest of the 3 please click here.
The 7520 Rate for December is 1.2% and for November was 1.0%.
UPCOMING SEMINARS AND WEBINARS
FREE WEBINARS OF INTEREST:
MONDAY, January 7, 2012, 12:30 p.m.
Please join us for Lunch Talk, a free monthly webinar series sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman, Esq. This month’s topic is the first part of a two part series with Shannon Waller from Strategic Coach. The topic for the two part series is Accelerating Law Office Teamwork with Interesting Tools You Can Use Immediately. To register for the webinar please visit the www.clearwaterbar.org.
TUESDAY, January 8, 2013, 5:00 – 5:30 pm
How to Land That First Job After College or Graduate School – What the Placement Office Hasn’t Told You. Recent college and graduate school graduates are having a difficult time finding their first professional job and are unaware of many proven techniques to help them find their first position. Job consultant Darry Griffis has an excellent track record in this area and will be sharing ten important techniques that your children or the children of your clients need to know to help find their first professional position.
THURSDAY, January 24, 2013, 4:00 – 4:50 p.m.
Please join us for the 444 Show. A monthly CLE webinar for professionals sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman. This month’s topic is Real Estate Tax Laws PALS & WOWS with Rick Buschart and Mike O’Leary.
MONDAY, FEBRUARY 4, 2012, 12:30 -1:00 p.m.
Please join us for Lunch Talk, a free monthly webinar series sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman. This month’s topic is the second part of the two part series with Shannon Waller on Accelerating Law Office Teamwork with Interesting Tools You Can Use Immediately. To register for the webinar please visit www.clearwaterbar.org
SEMINARS:
FRIDAY, JANUARY 18, 2013 Florida Bar Seminar
Save the date for a three day weekend in Ft. Lauderdale! The Florida Bar Continuing Legal Education Committee, the Health Law Section and the Tax Law Section present Representing the Physician 2013: Practical Considerations for Effectively Guiding Physicians and Their Practices. The seminar will be held at the Sheraton in Ft. Lauderdale, Florida. Speakers include Lester J. Perling, Esq., on the topic of Federal and Florida Health Law: Hypothetical Situations that Are Often Overlooked by Physicians and Alan S. Gassman on the topic of It is Not Just Health and Tax Laws: Charting Florida Waters When Designing Physician and Medical Group Arrangements. Laws you Knew or Wish you Knew.
WEDNESDAY, FEBRUARY 13, 2013
15th Annual All Children’s Hospital Estate, Tax, Legal and Financial Planning Seminar. All Children’s Hospital Foundation is hosting the Estate, Tax, Legal and Financial Planning Seminar at the All Children’s Hospital Education Conference Center in St. Petersburg. Programs and presenters include Samuel A. Donaldson on the topic of Federal Tax Update, Jonathan Blattmachr on Myths & Realities of Charitable Trusts and Some Really Cool Generation Skipping Tax Ideas, Investments in Trusts: Charting a Prudent Course by Tami Foley Conetta, and Alan S. Gassman on the topic of Avoiding Disaster in the Sunshine State – Tricks, Traps, and Nuances That Make Florida Planning Interesting and Unique.
Christopher Denicolo, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. He has co-authored several handbooks that have been featured in Bloomberg BNA Tax & Accounting, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters and the Florida Bar Journal. is also the author of the Federal Income Taxation of the Business Entity Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition Mr. Denicolo received his B.A. and B.S. degrees from Florida State University, his J.D. from Stetson University College of Law and his LL.M. (Estate Planning) from the University of Miami. His email address is Christopher@gassmanpa.com.
Kenneth J. Crotty, J.D., LL.M., is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has co-authored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, Estate Planning magazine, and Practial Tax Strategies. Mr. Crotty is also the author of the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman and Christopher Denicolo are the co-authors of the BNA book Estate Tax Planning in 2011 & 2012. His email address is Ken@gassmanpa.com.
Thank you to our law clerks that assisted us in preparing this report:
Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is Kacie@gassmanpa.com.
Alexandra Fugate earned her B.A. in English from the University of Florida in 2008, and J.D. from Stetson University College of Law in 2012. She has been a Guardian ad Litem for the past two years, a judicial intern for the Twelfth Circuit in Bradenton, and was recently admitted to the Florida Bar. She wants to pursue a career in business, employment, and labor law. Her email is Alexandra@gassmanpa.com .
Eric Moody is a third-year law student, scheduled to graduate in December 2012, at Stetson University College of Law and is considering pursuing an LLM in estate planning upon graduation. Eric is also an Articles and Symposia Editor for Stetson Law Review. In 2009, Eric received a B.S. in Business Management from the University of South Florida. Eric’s email address is Eric@gassmanpa.com.