Year-End Is a Good Time to Start Thinking About Estate and Gift Tax Planning

Year-End Is a Good Time to Start Thinking About Estate and Gift Tax Planning

As we approach year-end, it is a good time to think about estate and gift tax planning in order to maximize transfer tax savings while staying on track to meet your long-term financial planning goals. Following are a few of the significant, time-sensitive recommendations for you to consider.

Annual Gift Tax Exclusion

Each year individuals are entitled to make gifts (the “Annual Exclusion Amount”) without incurring gift tax or using any of their lifetime applicable exclusion amount. The Annual Exclusion Amount is currently $14,000 per donee and will remain the same amount in 2016. Thus, a married couple together will be able to gift $28,000 to each donee.

Make Gifts to Take Advantage of the Increased Applicable Exclusion Amount

In addition to making annual exclusion gifts, taxpayers should also consider making larger gifts. This year individuals now have a total of $5.43 million ($10.86 million for a married couple) that you can gift during your lifetime, subject to reduction for any gifts in excess of the Annual Exclusion Amount you have previously made. Gifts in excess of these amounts are subject to a maximum federal gift tax rate of 40%.

A countervailing consideration of lifetime gifting is that the gifted assets will not get a step-up in basis upon your death (as will assets you hold at your death) and will thus generate capital gains tax if they are sold for an amount higher than their cost basis. Accordingly, the decision of whether to gift assets depends on a number of factors, including the cost basis of your various assets, their projected income and appreciation, the total amount of your assets and your remaining applicable exclusion amount. Of course, maintaining a comfortable standard of living is a factor that also must be considered.

Consider Charitable Planning

Unfortunately, there is currently much uncertainty as to whether you can make IRA charitable rollover gifts this year. There is presently no law permitting such gifts, as the charitable rollover provision of the Code expired on December 31, 2014. Congressional action is still required to revive the law for 2015 and beyond.

Depending on your individual circumstances, it may make sense for you to go ahead and make the charitable gift from your IRA assets. Because this provision has not been extended, the IRA distribution would not qualify for exclusion from gross income, but the gift would qualify for an income tax deduction, subject to the applicable limitations on charitable deductions. Therefore, if you need to take your required minimum distribution for 2015 and want to make a charitable gift of that amount, then it should not adversely impact you and may be beneficial if the provision is extended for 2015 and future years.

Avoid the Medicare Surtax with Trust Income Tax Planning

A complex, non-grantor trust with undistributed annual income over $12,300 (or $12,400 in 2016) will be subject to the 3.8% Medicare surtax. However, some or all of the Medicare surtax may be avoided by distributing such income directly to beneficiaries who are below the individual net investment income threshold amount for the Medicare surtax ($200,000 for single filers, $250,000 for married couples filing jointly and $125,000 for married individuals filing separately).

Careful evaluation of beneficiaries’ circumstances and tax calculations should be made to determine whether trusts should distribute or retain their income.

Review and Revise Your Estate Plan to Ensure It Remains Appropriate

You should review your estate planning documents to make sure that those documents still make sense in light of recent gifting you may have done, increases in the lifetime estate exemption and given your current life circumstances.

You should continue to be cautious in relying on portability for your estate planning, as it is unclear that the portability provisions under existing laws will remain in place. In addition, a deceased spouse’s DSUE may not be available upon remarriage of the surviving spouse so a review of gifting strategies should be done before remarriage.

You also should review any provisions in your documents that distribute assets according to tax formulas and/or your applicable exclusion amounts to ensure that the provisions, when taking into account the higher applicable exclusion amounts, continue accurately to reflect your desires.

Now that same-sex marriages must be recognized by every state as well as the federal government, same-sex couples should review and revise their estate planning documents and beneficiary designations to ensure that the amount and structure of any bequests to the spouse are appropriate, as well as consider the benefits of split gifting for gift tax purposes and amending previously filed federal estate, gift and income tax returns and state income tax returns.

Year-End Checklist for 2015

In addition to the above planning ideas, you may want to consider the following before the end of 2015:

• Consider Roth IRA conversions for tax-free growth of these investments and the payment of income taxes may reduce future estate taxes.
• Create 529 Plan accounts before year-end for children and grandchildren, and consider front-loading the accounts with five years’ worth of annual exclusion gifts, taking into account any gifts made during the year to children and grandchildren.
• Pay tuition and non-reimbursable medical expenses directly to the school or medical provider which does not reduce available annual exclusions or lifetime gift exemptions.
• Consider making charitable gifts of appreciated securities before year-end to deduct the fair market value of these securities on your 2015 income tax return and avoid recognition of the capital gain.

We hope that this helps you with your year-end planning, and also provides you with some interesting ideas to consider for the future. As always, the advisors at Withum stand ready and able to assist you with these matters at any time. If you have any questions or would like to discuss this matter further, please contact a member of Withum’s Private Client Services Group by filling in the form below.