Article

• Jurisdiction: United States,Federal
• Citation: Vol. 28 No. 1 Pg. 14
• Pages: 14
• Publication year: 2015

Article Vol. 28 No. 1 Pg. 14 Utah Bar Journal February, 2015

January, 2015

The Evolution of Estate Planning

James S.Judd, J.

Overview

The American Taxpayer Relief Act of 2012 (ATRA), enacted January 2, 2013, drastically changed the landscape of estate planning. Under the federal estate and gift tax provisions of ATRA, the federal estate tax exemption of $5 million was made permanent and indexed for inflation ($5.43 million for 2015). ATRA also solidified the "portability" of a deceased spouse's unused federal estate tax exemption. These changes now allow married couples to shelter $10.86 million from federal estate tax in 2015 by merely leaving everything to a surviving spouse with a simple will. As a result, according to the Center for Tax Policy, approximately 99-8% of Americans will not be subject to any federal estate tax.

Although ATRA lessened the impact of the federal estate tax, it significantly increased the impact of the federal income tax on individuals, estates, and trusts by raising the maximum tax bracket from 35% to 39.6% and raising the capital gains tax on the highest income tax bracket from 15% to 20%. Although not a part of ATRA, the new Medicare tax of 3.8% on "net investment income" also increases the sting of federal income tax.

Income Tax Planning for Estates

Prior to ATRA, estate planning focused primarily on avoiding federal estate tax by using the federal estate tax exemption as early as possible during a taxpayer's life and avoiding the inclusion of assets in a taxpayer's estate. Federal income tax considerations were less important because of lower federal income tax rates and broader federal estate tax application. ATRA has changed the focus for a majority of taxpayers, from federal estate tax avoidance to federal income tax avoidance. Consequently, estate planners now have an increased motivation to structure estate plans that maximize the inclusion of assets in a taxpayer's estate because assets included in a taxpayer's estate will receive a basis step-up and eliminate or substantially reduce federal income tax on a subsequent sale of the assets. This type of tax basis management, now more than ever, will become a critical part of estate planning.

As estate planning evolves from federal estate tax avoidance to federal income tax avoidance, estate planners will implement more creative and aggressive strategies to avoid the increased sting of the federal income tax. "Reverse estate planning" is a...