2013 YEAR-END ESTATE PLANNING ADVISORY

12.6.2013

With 2014 quickly approaching, there are a number of tax planning opportunities you may want to consider before year-end. Also, outlined below is a recap of some of the recent estate, gift and generation skipping transfer ("GST") tax changes made in 2013, the inflation-adjusted 2014 federal estate, gift and GST exemption amounts and some things to look out for in 2014 and beyond.

Utilizing Your 2013 Gift Tax Annual Exclusion

Under the federal gift tax laws, each individual can give up to a certain amount annually ($14,000 in 2013 and 2014) to any number of people without exhausting any portion of his or her lifetime exemption from estate and gift tax. Consequently, a married couple can give up to $28,000 to each of their children and/or other individuals during the calendar year without incurring any gift tax. Such gifts may be made either outright or to certain types of trusts where the beneficiaries have withdrawal rights (sometimes referred to as "Crummey Trusts"), and can be in the form of cash, marketable securities or other property interests, such as family limited liability company interests, partnership interests, real estate or tangible personal property. (An appraisal may be needed to value assets other than cash or marketable securities.)

Please be aware that if an annual exclusion gift is made by check prior to year-end, the recipient must cash or deposit the check during 2013 in order for such gift to count as a 2013 annual exclusion gift.

Federal law also allows annual exclusion contributions to Section 529 education savings plans ("529 accounts"), which can be set up as separate accounts for each family member. Although contributions to 529 accounts are considered gifts, cash transferred to 529 accounts can grow tax-free and can also be withdrawn tax-free, provided the withdrawn funds are used to pay for college, graduate, vocational or other accredited school, or related expenses.

Contributions of up to $70,000 per individual ($140,000 for married couples) can also be made to 529 accounts in a given year and prorated over five years for gift tax purposes, until the plan's maximum contribution limit has been reached. A gift tax return must be filed to acknowledge the gift and make the corresponding tax election. During the five-year period, a prorated amount of the gift is treated as an annual exclusion gift to the beneficiary, so care needs to be taken in making additional gifts to that beneficiary in those years.

Donors may also want to keep in mind two additional gifting opportunities that are available under current tax law.

  • First, tuition may be paid on behalf of an individual directly to an educational institution. Reimbursement of tuition expenses to the benefitted individual will be treated as a gift for gift tax purposes, but direct payments to the educational institution will not. While this exception only applies to tuition, funds held in a 529 account can be used to pay other education expenses, such as room and board, books and related items.

  • Second, medical expenses may be paid on behalf of an individual directly to the provider. In order to qualify, such medical expenses must be unpaid and cannot be reimbursable by insurance. This exception includes payments for prescription drugs; expenses related to the diagnosis, cure, mitigation, treatment or prevention of disease; transportation essential to medical care; and premiums for medical insurance.

Connecticut residents should be aware that Connecticut imposes its own gift tax. The Connecticut gift tax annual exclusion mirrors the federal gift tax annual exclusion and generally follows the same rules. However, Connecticut provides for only a $2,000,000 lifetime gift tax exemption ($4,000,000 for a married couple if gifts are split), reduced by the amount of any prior gifts made since 2005 in excess of the annual gift tax exclusion amount. The tax rate on gifts over the Connecticut lifetime gift tax exemption ranges from 7.2% to 12%.

Like most other states, New York does not have a state gift tax.  As a result, New York residents have an extra incentive to make larger gifts during their lifetimes. 

Tax-Efficient Charitable Giving

Giving appreciated assets (assets that will incur capital gains tax upon sale) directly to a charity is a simple and tax efficient method for achieving your philanthropic goals. In most cases you can claim an income tax deduction based on the fair market value of the property contributed, and a qualified charitable organization will not incur capital gains tax when it sells the property. For taxpayers in higher tax brackets, gifting appreciated assets to charity in 2013 and beyond is an effective way to avoid the recently increased capital gains tax rate and the new additional 3.8% Medicare surtax.

Current law also allows individuals over the age of 70½ to direct up to $100,000 to be distributed from an individual retirement account ("IRA") to charity, thus avoiding the income taxes on such amount. In order to qualify, the transfer must be made from the IRA directly to the charity. Unless Congress acts to extend this charitable IRA rollover provision, it will expire on December 31, 2013.

In order to qualify for the aforementioned benefits, the recipient organization must be recognized by the IRS as a qualified charitable organization. If you are unsure about the status of a charity, we recommend that you request to see the organization's qualifying letter from the IRS. Usually, you can also check this information online (see IRS Publication 78), or, if you call us, we can assist you in verifying this information.

One other tax-efficient charitable giving technique that charitably-inclined clients may want to consider, especially now while interest rates remain low, is the creation of a Charitable Lead Annuity Trust ("CLAT"), which provides both philanthropic and tax benefits. A CLAT is a trust with two named beneficiaries. The first, the charitable lead beneficiary, will receive a fixed annual annuity payment throughout the term of the trust (for example, for ten years). At the end of a defined trust term, the assets remaining in the CLAT are then distributed to one or more remainder beneficiaries, typically the donor's descendants. Insofar as the trust's investment performance exceeds the "7520 Rate" (2% for December, 2013), the excess at the end of the trust's term will pass tax-free to the remainder beneficiaries.

2014 Estate, Gift and GST Tax Exemptions

Below is a recap of the current and inflation-adjusted 2014 federal estate, gift and generation-skipping transfer ("GST") tax exemption amounts.

  • Unified Estate and Gift Tax Exemption. As adjusted, the 2014 exemption will be $5,340,000, up from $5,250,000 in 2013.

  • GST Tax Exemption. The inflation-adjusted GST tax exemption will be $5,340,000 for 2014, up from $5,250,000 in 2013.

  • 40% Estate, Gift and GST Tax Rate. The maximum estate, gift and GST tax rate will remain at 40%.

  • Connecticut Unified Estate and Gift Tax Exemption. Connecticut has a unified estate and gift tax exemption of $2,000,000. This exemption is not adjusted for inflation.

  • New York Estate Tax Exemption. The New York estate tax exemption is currently $1,000,000. This exemption is not adjusted for inflation. New York does not currently have a gift tax.

Clients should note that while a surviving spouse may now take advantage of a deceased spouse's unused federal estate and gift tax exemption by filing a "portability election," portability does not apply to the GST tax exemption, nor does it apply to any state death tax exemptions. Accordingly, traditional "bypass trust" planning will still be needed to take maximum advantage of these exemptions.

Ongoing Planning Considerations

Finally, in addition to the planning opportunities noted above, we suggest that all our clients consider the following general questions in connection with their estate plans:

  • Have there been changes in your family or financial circumstances which might merit an update to your estate plan?

  • If you have an insurance trust or other irrevocable trust, are you up to date on your notices of withdrawal rights (also known as "Crummey letters") and gift tax returns?

  • Are your Living Wills and Powers of Attorney up to date? These documents can become "stale" if not updated every few years.

Final Thoughts

As 2013 comes to a close, we recommend that you consider making annual exclusion gifts prior to year-end if you have not already done so, and that you consider the various tax-efficient charitable and lifetime gifting options at your disposal. As always, we welcome the opportunity to discuss the planning options available to you in your particular circumstances. In the meantime, we wish you and your family the very best for the holidays and a wonderful 2014.

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