Estate Planning in 2014: Taxes are still Taxes

Background: Most (if not all) of the legal talking heads and CLE's (continuing legal education, for those of you who hate acronyms) which I have taken in lately all have come to the same conclusion: in a "high" estate tax exclusion environment, estate planning is no longer a one-size-fits all game.

What that means in English is not too long ago (say 1997), if you had over $600k and you died, you were potentially on the hook for estate or DEATH taxes, amongst others. Most of the planning revolved around beating this. The easy fix was you could leave up to that amount into a "credit shelter" or "bypass" or "family" trust, an then unlimited amount to your spouse, sometimes in a trust as well, and this would usually get the job done.

Now, we have over $5 million per individual in estate tax exemption dollars. A lot of people have $600k total assets: not many have over $5 million. Have over $5 million? You can double it with your spouse, and even the second to die spouse can use "portability" (carry over from the first to die) of exemption dollars should they need them. No spouse? There are still many options to reduce your taxable estate, and a million ways to reduce it by tax favorable gifts. No big deal as long as you plan for it.

Strategy in 2014:  The new strategy is you have to look at folks on a case by case and asset by asset basis. Instead of estate taxes, income taxes are the new rage in minimizing client's liability. For example, the big remaining tax favor the government gives us is the "adjusted cost basis at death," also referred to as the "Step up basis", but I don't use this term as it can also go down, even if it is a rarity. The point is, most folks biggest asset is their family home, or a family business, and instead of giving this away during life (and possibly generating transfer taxes) the better strategy can often be to hold onto it until death, when any appreciation and potential gains that would be taxed upon a sale will be wiped clean. In Texas, we have no state income tax, but we still have capital gains, which is why this makes sense here. In a state with high income tax (like California), a different asset class might cause a different set of planning, and so on.

Takeaways: The game has changed, so planning needs to change too. Income taxes are high (sorta) and estate taxes are the lowest they have been in a long time (not counting the 2010 fluke year). In this, planning needs have changed, and taking advantage of taxes for one client is very different from the next. If you have not reviewed your estate plan in a while, do. Check if your estate is forced into the 2 trust system, you might not need it. Check if you are paying more income taxes than you think you should or your business is such a plan needs to be made before the next generation takes the keys. The game may have changed, but the key players remain the same: don't sit back and end up paying more taxes than you have to.