Over the last two decades, changes in the estate tax laws have caused a great shift in the focus of estate planning. At one time, the primary issue was avoiding a 55% estate tax rate on a relatively modest level of assets. For example, in 1995 the federal estate tax exemption was only $600,000. Back then, it was easy enough to accumulate a taxable estate if you owned a home, a few investments and had purchased some life insurance. Families in these circumstances were happy to incorporate some sophisticated trusts into their estate plans to avoid that sizeable tax.
Now, however, the federal estate tax exemption is $5.43 million for 2015 and will increase annually based on inflation (for 2016, the federal estate tax exemption grows to $5.45 million). Additionally, the federal estate tax rate has been reduced to 40%, and married couples can combine their estate tax exemptions to $10.86 million per couple by making a proper “portability” tax election at the death of the first spouse. It is estimated that 99.8% of Americans will have no federal estate tax exposure under today’s laws. At the same time, however, the top income tax rate has climbed to 43.4%, and the maximum capital gains tax rate has increased to 23.8%. That means that estate plans which were drafted under the “old rules” may not work well for families today.
Under a traditional trust-based plan, the goal was to exclude the Family Trust assets, including all appreciation on those assets, from the surviving spouse’s taxable estate. While the Family Trust assets would not receive a step up in basis, this type of planning made sense since the top estate tax rate of 55% dwarfed the top capital gains rate of 15%. Now, however, if the concern over estate taxes is not an issue for a family, then reducing or eliminating capital gains taxes should be a part of effective estate planning, and preserving the step-up in basis for assets passing at the first spouse’s death should be a planning goal.
Therefore, instead of planning for excluding assets from the taxable estate, the new trend for couples with less than $10 million is to plan for estate inclusion so that their heirs will receive a basis step up. This can be accomplished in a number of ways, and you should consult with a trusted advisor to determine the best plan for your unique situation, and to see whether your existing plan should be revisited. Some other key items to consider in reviewing an outdated estate plan include whether mandatory Marital/Family Trust provisions are still helpful to your family; whether you should include provisions for a trust protector or trust advisor; whether your plan addresses the possibility that a beneficiary may become incapacitated or disabled; and whether you may wish to have the ability to change the situs of your trust, the governing law, or to add or remove beneficiaries.
Is it possible to modify or even revoke your inflexible, irrevocable trust? The answer under many circumstances is yes. If your documents are more than a few years old, then it’s time for an estate planning checkup.
Estate-tax-driven estate plans are a thing of the past for most Americans. Higher income tax rates, changing state laws, unfavorable jurisdictions and wayward heirs all add up to the need for an estate plan that adapts over time. Modern families need modern estate planning solutions, and our firm is ready to help you and your loved ones plan for now as well as what may happen in the future. Please call us at (860) 769-6938 for a review of your estate plan or for more information about establishing a plan for your family.