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Blogging from Heckerling - Estate Planning

Blog Post 1 of 4

This week, the 48th Annual Heckerling Institute on Estate Planning convened in Orlando, Florida. Heckerling is the largest and most prestigious estate planning conference in the country; this year’s Institute has drawn more than 3,000 attendees.

Several EisnerAmper professionals are attending this week's Institute and reporting on "hot" topics being discussed. This is the first of a series of blogs on the Institute.

On January 14, 2014, Paul S. Lee of Bernstein Global Wealth Management noted that there has been a fundamental paradigm shift in estate planning. The focus has shifted from reducing the transfer tax at all costs by having a client make lifetime gifts to taking into account the income tax implications of those transfers before implementing them.

More specifically, the old "tried and true" estate planning technique entailed having the client make gifts of appreciating assets to reduce the potential estate tax burden at his death.  Those transferred assets had a carryover basis in the hands of the recipient and were not eligible for a step-up in basis to fair market value at the client's death.   Because the estate tax rates were much higher than the income tax rates, the tax savings of making lifetime gifts outweighed any potential income tax savings from a "step-up" in basis that would be available if the client did not make any gifts. 

The landscape has changed drastically, and alters the practitioner's approach to estate planning. There are many factors that have changed the landscape, including the following:

  1. The American Taxpayer Relief Act of 2012 (ATRA) that increased the income and capital gains tax rates, set the estate, gift and GST tax top rate at 40%, and increased the gift, estate and GST exclusions and exemption to $5 million subject to annual indexing for inflation.
  2. The Health Care and Education Reconciliation Act of 2010, amending the Patient Protection and Health Care Act, that implemented a 3.8% Medicare surtax on net investment income starting in 2013.
  3. Many states have increased their income tax rates while at the same time a number of states have repealed their state estate and inheritance taxes.

As a result of the above, unlike in the past, the applicable federal and state income tax rates can be higher or close to the applicable federal and state estate tax rate. 

Therefore, effective estate planning will now require an analysis of the estate and income tax cost/savings of making a lifetime gift versus doing nothing.   In making this analysis, the following factors will need to be considered:

  1. Client's life expectancy,
  2. Client's spending habits and lifestyle,
  3. Client's charitable inclinations,
  4. Size of client's estate,
  5. Expected future performance of client's assets (income and appreciation),
  6. Income tax character of client's assets,
  7. Client's state of residence,
  8. Gift recipient's residence and marginal income tax bracket, and
  9. Expectation of future inflation and overall economic conditions.

In conclusion, because combined federal and state income tax rates can be higher or close to applicable federal and state estate tax rate, planning now requires an analysis of the income tax implications of any contemplated transfers.

Marie Arrigo is a Tax Partner and Co-Leader of the Family Office Services Practice for the Personal Wealth Advisors Group which provides tax consulting and compliance services to family offices, individuals, trusts and estates, and closely held businesses.

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