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Planning with New Estate Tax Exemptions

Written by Warren Averett on November 18, 2014

With the recently announced 2015 estate tax exemption of $5.43 million per person, planning for the estate tax may no longer be the biggest concern for many wealthy individuals.  With each couple now able to transfer via gift or inheritance a combined $10.86 million, the Estate tax will impact fewer people than ever before.  Also, portability makes it possible to use the full, combined exemption amount regardless of who owns which assets.

Under the current estate tax law, we are seeing that many clients’ existing estate plans may over complicate things for the survivor.  The need for the traditional plan of creating an exempt trust, a trust funded first with an amount no greater than the estate tax exemption, and then having all remaining assets pass to a spouse, either outright or in trust, may not be necessary.  If your combined net worth is under the $10.86 million, you could simplify your plan by leaving everything outright to your spouse.  This could provide two benefits: 1) avoid the additional costs, time and efforts to administer a trust and 2) allow for an additional step up in basis upon your spouse’s death.

The basis step up has always been a benefit of the federal tax code that raises the cost basis of an asset up to fair market value at the time someone passes away.  If you were to leave everything in trust at the first to die’s death, you would get a step up at that point only.  Any appreciation after that would then be subject to capital gains taxes, currently as much as 23.8 percent for federal taxes.  If you left the same property to a spouse outright, they would still get the step up at the first death and an additional step up at their death, thus avoiding taxes on the appreciation while the surviving spouse is living.

There are plenty of reasons such as asset protection, risk prevention and the benefits of fractional discounts that may still warrant the use of the traditional planning structure estate planners have been using for years and reasons why this streamlining may not fit your plan’s goals.  If you are unsure as to whether your plan accomplishes your goals in the most efficient manner in the current planning environment, please call your Warren Averett advisor today.

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