Mathieu, Ranum & Allaire, PLLC
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  • Ketchum 208-309-0390
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Ten Thoughts (Well, OK, Eleven) To Consider This Year End

The President's 2014 Budget proposals issued in April earlier this year are still being considered by the Congressional Budget Committee.  Also, many people wrote their wills and revocable trusts when the amount exempted from Federal gift and estate taxes was much lower.  Therefore,  the following are a few ideas (and there are many others) for you to consider with your attorney and accountant as you consider year-end planning or planning for 2014 and beyond.   Everyone’s personal situation is different so the following is just a brief discussion of concepts and tools you might take into consideration when meeting with your advisors and determining the legacy you wish leave with your family.

1.     Wills and Trusts with a Mathematical Formula Determining Where Assets will Go upon your Death…

Many people have wills and revocable trusts that were written when the amount that is exempted from estate and gift tax was much smaller than it is today.   To manage exposure to such a tax, their wills, or provisions in their revocable trust,

provide that assets are to be divided at death between a surviving spouse (or an estate tax marital deduction trust for that spouse) and a credit shelter trust. 

These wills and trusts usually also provide that the amount to be contributed to the credit shelter trust, a trust that will continue over generations for the benefit of your children, grandchildren and future generations, will be the maximum amount excludable from estate tax both at the time of the person’s death and also in the future upon distribution to a beneficiary or their death. 

The result of such a formula could mean that with today’s relatively large amount excludable from Federal estate tax  ($5,250,000 in 2013), the actual funding of such a trust could be greater than desired and indeed, for those with estates worth less than $5,000,000, nothing would be given to the surviving spouse either directly or via a marital trust. 

The estate tax exemption can be increased or decreased over time, so we suggest that you review your documents with your estate planning professionals to include language that permits your executor or trustee flexibility in allocating assets depending on the state of the estate tax exemption at your death.

As a final thought on this matter, many credit shelter trusts that we see provide that the spouse is a beneficiary of at least all its income if not also its principal, so that people could think sticking to such a formula is just fine.  However, if these assets were in the hands of the surviving spouse or his or her marital trust, rather than in the hands of the credit shelter trust, they would receive a second step up in cost basis at the death of the surviving spouse.  Then, if the assets are sold later, the spouse’s new, and hopefully higher, basis would drive the calculation of capital gains tax rather than the basis that existed at the death of the first spouse.

2.     Existing Family Trusts or Credit Shelter Trusts…

Consider withdrawing assets from any trusts in which you are a beneficiary and have withdrawal powers so that such withdrawn assets can be passed to your heirs at a potentially higher cost basis on your death.  If estate taxes would be due upon your death, however, further consideration needs to be given to the trade-off between estate taxes and capital gains and income taxes.

3.     Partnerships...

When the exemption from the Federal estate tax was much lower, many people created “Family Limited Partnerships” or Limited Liability Companies and contributed assets to such partnerships or companies so that they could give interests in such entities to family members at an advantageous gift tax cost.  Today with the higher exemption amount, we urge you to review any existing partnerships for their continued tax management value in light of the ongoing administrative costs and duties associated with such entities.

4.     “Intentionally Defective Grantor Trusts”…

This is the name coined for trusts that permit the person who creates and funds the trust to pay the income tax on trust income rather than the trust itself.  Determine if you have provisions in your trust to turn off grantor trust status if the government implements the President’s proposals to include the assets of such trusts in the estate of the grantor and/or impose a gift tax on trust distributions.

5.     Life Insurance Bought to Pay for Anticipated Estate Taxes…

Determine if the life insurance is still a viable tool in your estate plan and if the continuing cost is warranted.

6.     Trusts to Provide Medical and Education Payments for Future Generations…

In light of the President’s proposal to impose generation skipping taxes on distributions from such trusts, consider making distributions from that trust now rather than making direct gifts individually to pay for your loved one’s medical and education costs.

7.     Low Interest Rates and Intra-Family Loans…

If you are considering making a gift of an asset to a loved one, consider loaning the asset  (at an appropriate interest rate level) instead.  If you die before the loan is repaid, the remaining loan amount will be included in your estate at the cost basis existing at your death rather than when you first made the loan. This might well reduce the total capital gains tax that would be due if the asset were later sold.

8.     Charitable Contributions from IRAs after You Reach 70 ½….

In 2013, if you make a direct charitable contribution of up to $100,000 from your IRA, you will not have to pay income tax on the distribution from that IRA.  That tool is currently NOT available in 2014.

9.     If You Are a Trustee of a Trust… Behold the Need for Income Tax Planning

If you are trustee of a trust with beneficiaries who are not taxed at the highest income tax rates, consider making distributions to them from the trust - if permitted by the terms of the trust and advisable or appropriate for the beneficiaries.  Income retained in a trust is taxed at the highest income tax rate

and incurs the 3.8% surcharge as soon as income reaches $11,950.   Individuals incur the Medicare surtax only if they meet the individual income threshold

amounts ($200,000 for single filers; $250,000 for married couples filing jointly; and $125,000 for married couples filing separately). 

Additionally, if Idaho law governs your trust and the trustees have the power to change the governing law, consider carefully a change in the primary place of trust administration and governing law, to a state that does not impose state level income tax on income retained in the trust.  In addition to Federal tax on income retained in the trust, Idaho also taxes such income generated by an Idaho trust regardless of the location of the trust beneficiaries.

You and your advisors need to carefully consider all of the facts to determine the right strategy for you and your family.

10.  And Finally…

As appropriate, consider the annual gift tax exclusion of 14,000 per recipient ($28,000 per couple to each recipient) in both 2013 and 2014.  Consider also the funding of 529 plans and making of charitable gifts in this year.

11.  A Very Important, All-Inclusive After Note But Certainly NOT an Afterthought…

If you have been validly married as a same sex couple, consult with your attorney and other estate planning professionals about the implications for you of both the change in Federal recognition of such marriages and the above discussion.


The foregoing is NOT legal advice. We have prepared these materials to inform and educate. They are not, and should not be considered, legal opinions or advice to anyone, nor do they create an attorney client relationship by your reading them.  Note that these materials may not reflect the most current legal developments in the applicable area of law. Furthermore, this information should in no way be taken as an indication of future results.


For more information, contact Mathieu, Ranum & Allaire for a initial consultation.


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