News & Commentary

Recent changes in federal tax law suggest that we might benefit from rethinking how we set up many estate plans. We now have a generous $5,340,000 per person estate tax exclusion, which is adjusted by the cost of living. That means in 2015, it will increase to at least $5,450,000 per person.  At that rate, it won’t be long before it reaches $6,000,000 per person, so that the first $12,000,000 per couple will pass to the next generation free of estate tax.

Another factor to consider is that the maximum capital gain tax in California is now 20% + 3.8% + 13.3% = 37.1%, which is not significantly less than the 40% estate tax rate.  Traditional wisdom had one reduce estate tax since it was due on a date certain (nine months after the surviving spouse’s death) and it was higher than the capital gain tax. By contrast, the capital gain tax could be postponed if the children moved into the real estate; held on to the real estate; or did a tax deferred exchange under IRC Section 1031 with the real estate.

However, now with almost $11,000,000 per couple able to pass free of estate tax we have a new possibility: maybe it might be better to have that $11,000,000 “subject to estate tax” so that the children get a “step-up” in basis on the surviving parent’s death.  The elimination of capital gain on that entire $11,000,000 (which as we see above, will soon be $12,000,000), will eliminate a lot of capital gain at a rate as high as 37.1%, yet it won’t cost any estate tax due to the exclusion.

What does that mean?  On the first spouse’s death, instead of having that spouse’s assets first go to the “bypass” trust, which skips the surviving spouse’s estate, it may be best – in estates of about $11,000,000 – to have those assets go to a marital (QTIP) trust.  This way the assets will still be assured of going to the children of the first marriage.  However, they will be “included” in the surviving spouse’s estate and therefore will “step up” to the date of death fair market value at the survivor’s death.  If the estate turns out to be “too large,” the survivor will have the option to disclaim all or a portion of the first spouse’s assets into a “bypass trust.”

This type of engineering may be advantageous for your family.  There are, of course, other alternatives.  Give us a call or send us an email to discuss these interesting possibilities.  You have the chance to save your heirs a great deal of income tax..

Using a private foundation guarantees that your charitable wishes will be honored. They provide an efficient solution to gain the best bang for your buck in keeping the administrative costs to a minimum.

- The Estate Planning Law Team
  Rogers Sheffield & Campbell, LLP

This article is not intended to provide legal advice. For legal advice on any of the information in this post, please contact us directly, use the form to the right or contact us by phone at 805-963-9721.