Changes to Estate Planning in 2016: What Orange County Residents Need to Know
2016 Estate Tax Rates
What are the changes to estate planning in 2016? The American Taxpayer Relief Act of 2012 (the “Act”) made the following permanent: (1) the reunification of the estate and gift tax regimes, (2) the $5 million estate, gift and generation-skipping transfer (“GST”) tax exemptions, as increased for inflation (as discussed below), and (3) portability.
Estate Planning Changes for 2016
- In 2016, there is a $5,450,000 federal estate tax exemption (increased from $5,430,000 in 2015) and a 40% top federal estate tax rate.
- In 2016, there is a $5,450,000 GST tax exemption (increased from $5,430,000 in 2015) and a 40% top federal GST tax rate.
- In 2016, the lifetime gift tax exemption is $5,450,000 (increased from $5,430,000 in 2015) and a 40% top federal gift tax rate.
- In 2016, the annual gift tax exclusion is $14,000 (no increase from 2016).
How do the 2016 Estate Tax Laws Affect My Estate Plan?
If you recently updated your estate plan, these increases may not significantly affect your estate plan. However, if it has been several years since you last reviewed your estate plan, the exemption amounts when you executed your estate plan could have increased dramatically, causing some unwanted results. Modern Wealth Law designs its estate plans to allow for flexibility and changes in the law.
Portability
In 2012, Congress began allowing “portability.” Portability allows a surviving spouse to use a deceased spouse’s unused estate and gift tax exemption. Portability is intended to prevent families from incurring gift and estate tax that could have been avoided through proper estate planning (for example through a bypass trust). The following is an example of how portability affects your estate plan:
Estate Planning Without Portability
With our first hypothetical, let’s assume that portability does not exist. Let’s further assume that Husband has $5 million of assets and Wife has $3 million of assets. Husband dies in 2012 leaving his entire $5 million to his Wife. Even though Husband has an estate of $5 million and a federal estate tax exemption of $5 million (for all purposes of this example, the exemption is not adjusted for inflation), his federal estate tax exemption is wasted because property passing to Wife qualifies for the unlimited federal estate tax marital deduction, and the marital deduction is applied before applying the federal estate tax exemption. Now suppose that Wife dies in 2016, the $5 million that she inherited from Husband had appreciated to $7 million, and her own $3 million remained the same value. Her total estate at her death is now $10 million. Applying her $5 million federal estate tax exemption, the remaining $5 million of her estate would be subject to federal estate tax at 40%, resulting in a tax of $2 million.
Estate Planning With Portability
Now assume that portability applies upon Husband’s death. Because Husband has $5 million of unused estate tax exemption, this can be passed to Wife for her use. Now, upon Wife’s death in 2016, she has her own $5 million of federal estate tax exemption as well as the $5 million of federal estate tax exemption that she inherited from Husband, for a total federal estate tax exemption of $10 million. Since her estate is $10 million ($7 million from her Husband, and her own $3 million), her Estate can apply her entire $10 million federal estate tax exemption to protect her entire estate from federal estate taxes. With this example, portability saved the heirs $2 million in federal estate taxes.
Portability is not a solution for lack of estate planning. Estate planning for most individuals is still needed to avoid probate and ensure that their intended heirs receive his or her estate. Also, portability does not apply to the GST tax exemption. Most states that have separate state estate tax regimes do not permit portability. Use of other estate planning options, such as bypass trusts at the first death of a married couple, may be most useful where these limits on portability are applicable.
Please do not hesitate to contact John Wong, an Estate Planning Attorney in Orange County at Modern Wealth Law so that we can review your documents and make sure that they are up to date and reflect your current wishes.
John Wong advises on all aspects of estate planning, probate, asset protection and trust administration. He believes that estate planning is about planning for life; while having protections in place should the unexpected occur.
