ILNews

Duncan: Learn these estate planning changes

Back to TopCommentsE-mailPrintBookmark and Share
Indiana Lawyer Focus

After many years of complete uncertainty with the federal estate tax, there is now a law in place that provides some level of predictability. Further, in 2013, Indiana repealed its inheritance tax. Indiana’s inheritance tax was known as one of the most onerous of all the states and resulted in many snowbirds making Florida their permanent home.

Effects on estate planning

duncan-greg-mug Duncan

While the federal law was not the hoped-for outright repeal of the death tax, it does provide certainty and a permanent exemption at the highest historical levels – $5.34 million per person ($10.68 million for a married couple) in 2014. The law also made permanent “portability” of the exemption amount, which means that the portion not used by one spouse at death can now be used by the surviving spouse. The exemption amount (whether your own or obtained from a predeceased spouse) can now be used to make lifetime gifts or gifts at death, which is a tremendous advantage compared to the historical $1 million limit on lifetime gifts. The death tax rates have decreased over the years from a high of 55 percent to the current 40 percent rate.

This means that, for 99 percent of Americans, estate planning will shift away from death taxes. The focus will shift to life insurance, income tax and business-succession planning. For those of high affluence and whose estates exceed the exemption amount, planning will continue as usual, with particular attention to the impact of the new income tax laws on their plans. The trust and estate professional will need to hone skills to get up to speed with non-customary services to remain relevant and add value for clients.

For the married couple of modest means or who are affluent but whose estate does not exceed the high exemption of $10.68 million, complacency is not the answer. It is still necessary to plan.

What should practitioners review with clients?

Familiarity with the new income tax laws will take time, and prior estate planning techniques should be reviewed for tax law impacts. Many “old” trusts may need to be actively managed to minimize the income tax consequences. The net investment income tax can be very burdensome to many trusts.

Life insurance policies should be reviewed and managed. Many policies were purchased to pay death taxes at a time when the exemption was much lower – $600,000 (and the rates were much higher – 55 percent). As the imposition of the death tax becomes less of a factor, the liquidity afforded by life insurance may lose its luster in light of the premium outlays. These policies may not be needed, may be deployed in some other fashion (e.g., gifted to children or grandchildren to pay the ongoing premiums), or even possibly sold to the highest bidder in the life settlement market.

Family limited partnerships (commonly referred to as FLIPs) have been created by many families to help facilitate lifetime gifts. In light of the change in the death tax landscape, many families are re-evaluating the continued use of the FLIP. There are many income tax issues to consider with unwinding a FLIP, depending on the current owners: the duration of existence, whether property contributed had a built-in gain, and whether liquidating distributions are made pro rata under the treasury regulations, among other factors. Competent tax advice should be sought prior to liquidation.

One of the more interesting income tax issues to be managed and understood is the interaction between death taxes and income taxes in light of the “step-up” in basis rule. This rule says that most assets receive a change in basis at a person’s death. The new basis becomes the value on the date of death. Assume a person owns Eli Lilly & Co. stock that has a $0 basis. If the person sells the stock there would be capital gains tax on the sale proceeds. If the stock were gifted during lifetime to children and the children sell the stock, the children would have the same capital gains tax (gifted assets have a “carryover” basis to the donee, meaning that the donee receives the donor’s basis). By contrast, if the stock is left to children after a person’s death, and the children sell the inherited stock the day after death, there would be no capital gains tax. While this rule is commonly referred to as the “step-up” in basis, it can also result in a “step-down” in basis (e.g., publicly traded stock purchased for $100,000 during life but only worth $50,000 at death will result in a new basis of $50,000, and the possible income tax “loss” will vanish).

Assessing assets in light of changes

Out of fear of the death tax, most laypersons (and appraisers) assume that assets are to be valued at the lowest possible value after a person’s death. However, in light of the high exemption amounts and the step-up in basis rule, that may not be the case. Most people should want assets to be valued at the highest possible value as long as it does not exceed the death tax exemption amount. Thus, for hard-to-value assets (real estate or business interest), assuming a person’s estate will not exceed the exemption amount, most should want the value to be as high as reasonably possible so as to minimize future income taxes (or increase current depreciation expenses for depreciable assets). Most appraisers recognize that there is a range of reasonableness, and it may be necessary to educate appraisers to understand the issues or to merely state that you do not want the lowest possible value. Many are not familiar with these scenarios, and understanding these rules is critical to advising families on which assets to gift or sell during lifetime and advising estate administrators in order to minimize future income tax.

While the estate tax laws are great for our clients, there is still much work to be done. Estate plans or techniques that are dated by five years or more should be reviewed with a fresh perspective in light of the changes that have taken place over the last two years.•

__________

Greg J. Duncan is a partner in the Indianapolis office of Bingham Greenebaum Doll LLP. He practices in the areas of estate planning, probate and trust administration, estate and gift tax planning, estate litigation and nonprofit planning. He is a certified trust & estate lawyer by the Indiana Trust & Estate Specialty Board. He can be contacted at gduncan@bgdlegal.com. The opinions expressed are those of the author.

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. Just an aside, but regardless of the outcome, I 'm proud of Judge William Hughes. He was the original magistrate on the Home place issue. He ruled for Home Place, and was primaried by Brainard for it. Their tool Poindexter failed to unseat Hughes, who won support for his honesty and courage throughout the county, and he was reelected Judge of Hamilton County's Superior Court. You can still stand for something and survive. Thanks, Judge Hughes!

  2. CCHP's real accomplishment is the 2015 law signed by Gov Pence that basically outlaws any annexation that is forced where a 65% majority of landowners in the affected area disagree. Regardless of whether HP wins or loses, the citizens of Indiana will not have another fiasco like this. The law Gov Pence signed is a direct result of this malgovernance.

  3. I gave tempparry guardship to a friend of my granddaughter in 2012. I went to prison. I had custody. My daughter went to prison to. We are out. My daughter gave me custody but can get her back. She was not order to give me custody . but now we want granddaughter back from friend. She's 14 now. What rights do we have

  4. This sure is not what most who value good governance consider the Rule of Law to entail: "In a letter dated March 2, which Brizzi forwarded to IBJ, the commission dismissed the grievance “on grounds that there is not reasonable cause to believe that you are guilty of misconduct.”" Yet two month later reasonable cause does exist? (Or is the commission forging ahead, the need for reasonable belief be damned? -- A seeming violation of the Rules of Profession Ethics on the part of the commission) Could the rule of law theory cause one to believe that an explanation is in order? Could it be that Hoosier attorneys live under Imperial Law (which is also a t-word that rhymes with infamy) in which the Platonic guardians can do no wrong and never owe the plebeian class any explanation for their powerful actions. (Might makes it right?) Could this be a case of politics directing the commission, as celebrated IU Mauer Professor (the late) Patrick Baude warned was happening 20 years ago in his controversial (whisteblowing) ethics lecture on a quite similar topic: http://www.repository.law.indiana.edu/cgi/viewcontent.cgi?article=1498&context=ilj

  5. I have a case presently pending cert review before the SCOTUS that reveals just how Indiana regulates the bar. I have been denied licensure for life for holding the wrong views and questioning the grand inquisitors as to their duties as to state and federal constitutional due process. True story: https://www.scribd.com/doc/299040839/2016Petitionforcert-to-SCOTUS Shorter, Amici brief serving to frame issue as misuse of govt licensure: https://www.scribd.com/doc/312841269/Thomas-More-Society-Amicus-Brown-v-Ind-Bd-of-Law-Examiners

ADVERTISEMENT