Dear Clients and Colleagues,
This letter is an update on the most recent gift and estate tax developments, including new provisions applicable to same-sex couples, and presents our current thinking regarding wealth planning in 2014. It also serves as a follow-up to our past yearly tax updates, which can be accessed by clicking the “Family Wealth and Tax Planning” link on our firm website (www.hopkinscarley.com), and viewing the “Related Articles” on the right side of the screen.
This letter is intended to help you understand current law so that you may have the best information available as you plan. While you may want to revisit your estate plan now to identify any revisions necessary to optimize your planning, you should keep in mind that Congress may enact new laws at any time, especially given the current volatile political climate, resulting in more changes as budget deficits and spending issues are addressed. This might necessitate further planning.
Estate, Gift, and GST Taxes
The top estate, gift, and GST tax rates remain in place at 40% for decedents dying and lifetime gifts made after December 31, 2012. The estate, gift, and GST tax exclusion/exemption amounts remain unchanged at $5,000,000, adjusted for inflation for years after 2011. The inflation-adjusted exclusion/exemption amount increased from $5,250,000 in 2013 to $5,340,000 for 2014, representing an increase in estate, gift, and GST tax exclusion/exemptions of $90,000 for 2014.
The annual gift tax exclusion also remains unchanged at $14,000 per recipient (or $28,000 for a married couple splitting gifts). The gift tax annual exclusion amount applies individually to each combination of donor and donee. For example, a parent can give each child or other family member/friend a gift valued at $14,000 without a gift tax liability or a gift tax return filing requirement (assuming these are the only gifts the parent makes in the tax year). If non-cash gifts are made, we would suggest that a gift tax return (IRS Form 709) be filed so as to commence the statute of limitations on audit of the valuations used.
Please remember that tax-free gifts can be made for medical and education expenses, but only if the payment is made directly to the institution or medical provider; reimbursement to the individual who has already paid for the expenses does not qualify as a tax-free gift.
Please also remember that although unlimited gifts may be made between spouses who are U.S. citizens, in 2014, the annual exclusion for gifts to non-citizen spouses is $145,000 (up from $143,000 for 2013).
Same-Sex Couples and Taxes
Following the United States Supreme Court decision in United States v. Windsor, 133 S.Ct. 2675 (2013), the Internal Revenue Service (“IRS”) confirmed that any couple, regardless of gender, with an official marriage license shall be treated as “married” for purposes of all federal tax laws. This IRS pronouncement marks a seismic shift in federal tax policy, changing the way same-sex couples deal with tax matters. All married couples are now expected to file their federal tax returns, including gift and estate tax filings, consistent with that marital status. This new policy applies to any couple with a valid marriage license issued from any U.S. state or territory, or any foreign jurisdiction, and applies whether or not the couple currently lives in a state that recognizes same-sex marriage.
For estate planning purposes, the IRS pronouncement, in combination with the Supreme Court decision in Windsor, now allows same-sex couples (assuming that the recipient or surviving spouse is a U.S. citizen) the ability to [i] make unlimited gifts to his/her same-sex spouse free of any gift tax, [ii] defer estate taxes at the death of the first spouse and [iii] pass assets to the same-sex spouse at death without incurring estate tax, consistent with existing marital deduction rules. In addition, previously married same-sex couples may retroactively amend any of their income, gift, estate and other federal tax filings from the last three (3) years to reflect their marital status, if it would be advantageous to do so. Consultation with your tax advisor is thus advised to see if amending your past returns may be appropriate.
The IRS pronouncement providing equal treatment to all married couples, regardless of gender, also affects tax-advantaged retirement savings (pensions, 401(k)s and IRAs). Any couple with a valid marriage license must receive equal treatment under the federal tax code and other laws from any retirement plan for beneficiary designations, joint annuities, rights of survivorship, and other benefits. Thus, as part of their annual tax preparation, all couples, particularly same-sex couples in light of the 2013 law changes, should check to make sure beneficiary designations for retirement plans (as well as life insurance) are properly updated and, specifically, not left blank or “to my estate.” Please contact us if you have any questions regarding beneficiary designations, as they can vary on a case-by-case basis.
Retirement Plans and Individual Retirement Accounts
For 2014, the maximum contribution amount an individual may make to an employer-sponsored retirement plan remains at $17,500 from 2013. The catch-up contribution (for taxpayers age 50 and older) also remains the same in 2014 at $5,500. The amounts are indexed for inflation in future years.
An individual taxpayer may deduct contributions to a traditional Individual Retirement Account (“IRA”) depending upon his/her income level and whether he/she (or spouse) is covered by an employer-sponsored retirement plan at work. An individual not covered by an employer-sponsored retirement plan (and, if married, whose spouse is also not covered) may deduct contributions to a traditional IRA regardless of his/her income level and filing status. All others may only deduct traditional IRA contributions if their income falls below certain levels.
For 2014, a taxpayer who is covered by an employer-sponsored retirement plan cannot deduct contributions to a traditional IRA if his/her modified adjusted gross income (“MAGI”) exceeds: $70,000, if filing as single or head of household (up from $69,000 in 2013); $116,000, for married taxpayers filing jointly (up from $115,000 in 2013); and $10,000, for married taxpayers filing separately. For a married taxpayer filing jointly who is not covered by a plan but whose spouse is covered, the MAGI limit for 2014 contributions is $191,000 (up from $188,000 for 2013 contributions), while for a married taxpayer filing separately, the limit is $10,000.
Contributions to a Roth IRA for 2014 also have the following limitations based on MAGI and filing status:
$129,000 for taxpayers filing as single or head of household (up from $127,000 in 2013)
$191,000 for taxpayers filing jointly (up from $188,000 in 2013)
$129,000 for those taxpayers married but filing separately, but only if the taxpayer did not live with his/her spouse at any time during the year (up from $127,000 in 2013); otherwise $10,000
The Obama administration’s Revenue Proposals, the so-called “Green Book,” contains the administration’s revenue proposals for the upcoming fiscal year. Several of those, as well as earlier proposals that could be revived, would severely limit estate and gift tax planning benefits. The Obama administration’s proposals for the 2014 fiscal year include the following beginning in calendar year 2018: making the top transfer tax rate 45% (40% currently); decreasing the exclusion/exemption amount for estate and GST taxes to $3.5 million (currently $5,000,000, but subject to annual inflation-based adjustments in succeeding years, e.g., $5,340,000 in 2014); decreasing the exclusion/exemption amount for gift taxes to $1,000,000 (currently $5,000,000, but subject to annual inflation-based adjustments in succeeding years); no indexing for inflation; no clawback by reason of decreases in the applicable exclusion amount with respect to a prior gift that was excluded from tax at the time of the transfer; and portability would continue to be allowed.
As mentioned in prior Tax Updates, President Obama’s Green Book also calls for several restrictions on beneficial tax planning vehicles, such as imposing a 10-year minimum term for GRATs; limiting the use of valuation discounts for certain transfers of interests in family-controlled entities; requiring the expiration of GST-exempt status of any trust 90 years after the trust’s creation; and limiting the effectiveness of grantor trusts.
None of these proposals have yet to be taken up by Congress, but as budget shortfalls continue, Congress may certainly act. Therefore, clients with sizeable estates are encouraged to make structured gifts and/or transactions to utilize their exemptions and to take advantage of current allowable planning techniques prior to the date of enactment of any such proposals.
Reminder to Check Title of Assets
Establishing and creating an estate plan is only one piece to the planning process. Funding the plan is also a crucial step in order to achieve your estate planning objectives. Accordingly, as part of your annual tax preparation, you should confirm that title to your financial accounts and real property is correct. For this purpose, any assets intended to be held in your revocable trust must be titled in your name(s) as trustee(s) of the trust. You should also update “Schedule A” to your revocable trust once each year.