Trusts And Estates News Alert

Introduction: Federal Estate Tax, Gift Tax, Generation-Skipping Transfer Tax and Related Income Tax Rules in 2016

In January 2013 Congress reformed the federal estate, gift and generation-skipping transfer taxes and several related income tax rules.  In July of that year, the Washington Legislature significantly amended the Washington estate tax.  Since then only a few significant tax changes have occurred, for the most part relating to inflation adjustments:

  • The federal estate tax now has a $5,450,000 exemption per person (the 2011 $5,000,000 exemption amount, as indexed for inflation) and still has a 40% flat rate.
  • The federal gift tax and generation-skipping transfer tax also have a $5,450,000 exemption and a 40% flat rate.
  • The federal estate tax portable exemption rule—allowing a surviving spouse to receive any unused federal estate and gift tax exemption of the deceased spouse—is still in effect, and our clients are using it more and more frequently.
  • The federal gift tax “annual exclusion” has remained at $14,000.
  • The beneficial “step up in income tax basis” rules continue in effect. In spring 2016 we have been dealing with new federal income tax basis reporting requirements—if a federal estate tax return is filed, the beneficiaries must receive another form stating the income tax basis of assets they receive.
  • The higher 2013 federal income tax and capital gains tax rates are still in effect, with a maximum income tax rate of 39.6% and a maximum capital gains tax rate of 23.8% (20% plus the 3.8% Medicare surtax).  Trusts and estates continue to pay at the highest possible income tax rates—for 2016 taxable income in excess of $12,400, 39.6%.
  • The Washington estate tax exemption amount for decedents dying in 2016 is $2,079,000 (the 2006 $2,000,000 exemption, plus inflation adjustments since 2013), its gross rates range from 10% to 20%, and it is still a deduction against the federal estate tax. The Washington estate tax is unlikely to change in the foreseeable future.  Washington has no portable exemption rule.

Beware: Formula Clauses

It is a good idea to check your will or revocable trust and to determine whether you have a formula gift clause, because the tax laws have changed so much in recent years; in particular, because the estate and generationskipping transfer tax exemptions have increased so much (for example, the federal estate tax exemption was $675,000 in 2001 and now is $5,450,000).  Unless formula clauses are updated, the surviving spouse, charities or a generationskipping trust might receive far more or less than intended.  For example, if a husband dies and his pre-2005 marital deduction formula gift clause gives the wife “the smallest fraction of [the residue] necessary to reduce the federal estate tax to zero,” with no reference to the Washington estate tax enacted in 2005, the entire residue of his $5,450,000 estate might pass to the “Bypass Trust” and trigger almost $450,000 of Washington tax—in the first estate!  If you have updated your will or revocable trust since 2012, your new language should automatically refer to the current exemption amounts. Otherwise, contact us.

Reasons to Update

In 2016 many clients are updating estate plans and documents, for several reasons:

  • Some clients will want to update their durable powers of attorney because the Washington Legislature recently enacted its version of the Uniform Power of Attorney Act. If the durable power of attorney refers to this Act, it will automatically include many helpful provisions; for example, powers relating to financial institutions, real estate, and qualified retirement plans and IRAs. New forms will be available later this year.
  • The Washington Legislature also recently enacted the Uniform Fiduciary Access to Digital Assets Act, which for the first time will clearly allow your will, trust or durable power of attorney to authorize your representative to deal with online accounts, passwords and the like (particularly if your password and other information is available to the fiduciary). New forms are now available.
  • While the courts have recently restricted creditor protection afforded to inherited individual retirement accounts, language included in a will or revocable trust can restore that protection.
  • Earlier this year the Congress made permanent a law which allows IRA participants who are over age 70½ to give $100,000 of the account to qualifying charities each year, without income tax percentage limitations. Such gifts count against the participant’s required minimum distribution. In our experience, this benefit only applies to a few clients, but for them it is significant.
  • Finally, in 2014 a new Physician Orders for Life Sustaining Treatment or “POLST” form—which can supplement Washington’s “health care directive” or living will—was published, and more and more of our clients are using it.

Strategic Issues to Consider

  • Couples who have assets the value of which exceeds one federal estate tax exemption (again, $5,450,000 in 2016) are amending their estate planning documents, to make sure that both federal estate tax exemptions can be used in some way (perhaps by the survivor making a federal estate tax portable exemption election).
  • Couples who have assets the value of which exceeds one Washington estate tax exemption ($2,079,000 in 2016) are amending their documents to make sure that both Washington exemptions can be used in some way (perhaps by funding a Bypass Trust).
  • The $14,000 federal gift tax annual exclusion continues to facilitate a range of estate and gift tax planning strategies, including the establishment of irrevocable trusts which can purchase life insurance on the client’s life.
  • While the Congress and Treasury Department have talked for years about regulations to limit the use of leveraging and discounting strategies, no regulations have been issued yet and those strategies still exist (some in the Treasury Department say those regulations will be published in September 2016). Those strategies can be quite effective, particularly for major lifetime gifts of business interests.
  • There are still good ways to avoid the Washington estate tax, including major lifetime gifts, even deathbed gifts (because Washington has no gift tax), and, as a last resort, moving out of Washington. Couples thinking about the survivor moving out of Washington are using revocable living trusts and making other planning arrangements to facilitate the move when the time comes.

PDF of news alert.

The opinions expressed in this news alert are those of the authors and do not necessarily reflect the views of the firm or its clients.  This article is for general informational purposes and is not intended to be, and should not be taken as, legal advice.

The Riddell Williams Trusts, Estates and Personal Planning practice group has a unique blend of planning experience, technical expertise and responsiveness to clients’ needs. Estate plans are as varied as the individuals who make them. Our group’s clients include wealth builders, business owners, single persons, intergenerational family members, real estate, and international clients.