Estate Planners and New Tax Rules: Changes to Know About in 2014

The stakes are high for individuals and families who meet the threshold for estate taxes. And the landscape in 2014 is unlike it has ever been before. Here are some tips on how to address this year's changes to estate tax rules.

Feb 10, 2014 at 3:45PM

If you meet the threshold for estate taxes, think of 2014 as a landmark year in your planning. The rules surrounding exemptions and gifts have changed, and the impact could be far-reaching for your family -- perhaps more so than many planners initially realize.

As the new structures fall into place and the details of new limits and portability within your legacy assets come into focus, you'll want to pay attention to the following key details. They represent remade horizons and revised parameters for estate planning -- all unique to this year, and all of them sure to influence your next estate moves.

Tax changes you need to address: estate planning 2014
In general, if you're going to be affected by the following 2014 estate tax rules changes, it's because you're among the wealthiest of estate planners in the United States.

Being subject to the estate tax means that your individual estate assets start with at least $5.34 million in the balance -- a number adjusted upward for inflation from $5.25 million during 2013.

That's much higher than the roughly $1 million that the estate tax would have reverted to without new legislation early last year. A married couple's federally taxable estate, thus, now begins in the realm of $10.68 million. One result of this new number is that we're talking about something on the order of only two in every 1,000 cases.

But if you are in that category, these changes stand to profoundly affect how you maintain your wealth. Learning about the shifts underway can save you money and headaches as you navigate the estate-planning waters.

  • Estate-tax exemption: Beyond the increased limit to what is tax-free within an estate, rules about how they can be moved have also changed. As of 2014, surviving spouses in many cases can "port" a portion of their deceased spouse's exclusion into their own limit by filing a federal estate tax return. No longer necessary are the old bypass trusts that individuals used to preserve the exemption of a first-to-pass spouse. Though there are some limitations built into the new portability rules, there's no question it's a system that has been made a bit friendlier to the surviving individual.
  • Estate-tax rates: In addition to increasing the estate tax exemption, Congress set the after-exemption tax rate on estates at 40% rather than allowing it to revert to as high as 55%. So, therein lies a potential break for estate planners as well.
  • Gift-tax exclusions: With the amount of allowable exemptions raised significantly, the maximum for annual gifts -- $14,000 per donee (indexed for inflation) -- might seem less significant these days. For example, two parents with two children could annually move just $56,000 into such instruments (2 x 2 x 14,000). Still, someone with an estate that exceeds the new $5.34 million exclusion might now use annual exclusion gifts -- given to his or her children, descendants, or friends -- to limit the growth of the estate and remove assets from it without subjecting them to a gift tax or an estate tax. A key point of decision here is whether to do so and forgo the usual step up in basis at death. Taking the step-up option could mean avoiding the capital gains tax when the passed-along assets are evaluated at fair market. With some careful planning (and probably expert consultation), you might be able to work both scenarios into your outcome. 
  • Generation-Skipping Transfer: Changes surrounding how GSTs work may be right over the horizon. With new proposals potentially on the way to restrict techniques for taking advantage of the generation-skipping transfers -- an oft-cited goal is to curtail note sales to long-term grantor dynastic trusts -- getting assets into trusts before capital gains come into play could be a priority.

Some states have independent state-level estate or inheritance taxes, and some of these have exemptions that are lower than the federal level. For example, in New Jersey the exemption threshold is $675,000. At least 20 states have their own taxes ranging generally from 10% to 16%.

Individuals and couples should investigate the details pertaining to their state of residence -- and also those details of any state in which they own property. Only two states, Connecticut and Minnesota, impose a gift tax.  

Finally, the estate and gift taxes are never entirely tucked away from the effects of political and budget waves that can rock Washington. It's always possible that the estate- and gift-tax exemption amounts and rates will see renewed scrutiny. That means the exemption amount could be reduced in the future to bring more estates into the system.

So while death and taxes may be our certainties in life, what estate and gift rules will look like in 10 years -- or even next year -- is far from set in stone.

Is Uncle Sam about to claim 40% of your hard-earned assets? 
Thanks to a 2013 law called the American Taxpayer Relief Act, he can -- and will -- if you aren't properly prepared.

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James O'Brien is a contributor to WiserAdvisor.

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