James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comFirm Insights
Is Income Tax Planning Now More Important Than Estate Tax Planning?
Author: James F. McDonough
Date: June 6, 2013
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Two changes to federal estate tax law suggest that income tax planning may become more important than estate planning for most taxpayers.
First, the $5,250,000 federal estate tax exclusion (the “Exclusion”) is permanent. Thus, most estates will not be subject to federal estate tax now that the Exclusion is law. A married couple may pass $10,500,000 to their heirs free of federal estate tax using the sum of their two Exclusions.
Second, “portability” now permits a surviving spouse to add the unused Exclusion of the deceased spouse to the Exclusion of the surviving spouse. Before portability, the exclusion was lost if it not was not applied to shelter a taxable transfer at the first death. Today, portability lessens the importance funding a trust in the estate of the first-to-die.
Some practitioners believe that all assets should be held by the surviving spouse in order to obtain another step-up in basis at the second death. The assumption is that a step-up in basis at the second death will eliminate income taxation. Where the value of the second estate is below the level of one or both Exclusions, the result is no tax.
There are counter arguments. An estate tax return must be filed to elect portability and we know that many taxpayers will fail to file and lose portability. I anticipate that there will be a number of cases where a surviving spouse remarries. What the public may not realize is that portability only extends to the last spouse. Thus, if the surviving spouse remarries, the anticipated result may not be achieved. could It is also possible that, given the liquidity infused into the banking system by the Federal Reserve, inflation will result. This could cause asset values to increase beyond the Exclusions for intermediate size estates. Finally, the exemption for generation skipping tax is not portable and this fact suggests that funding a trust at the first death may still be beneficial.
- Practices: Tax, Trusts & Estates
- Locations: Red Bank, NJ, New York City, Little Falls, NJ
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