Estate Planning Strategies for Married Couples in the New Decade
18 Feb 2020Judith Gordon
The American Taxpayer Relief Act of 2012 (ATRA) and the 2017 Tax Cuts and Jobs Act (TCJA) implemented sweeping changes to estate planning techniques for married couples. While ATRA made permanent the basic exclusion amount of $5 million for an individual (indexed for inflation) for federal estate, gift, and generation-skipping transfer taxes, TCJA doubled the basic exclusion amount from $5 million to $10 million with adjustments for inflation after 2011. The basic exclusion for an individual in 2020 is $11,580,000. However, TCJA also stipulates that the basic exclusion amount will revert to $5 million adjusted for post-2011 inflation after 2025, which equates to approximately $6 million.
ATRA also introduced and made permanent the concept of portability — the ability to transfer a deceased spouse’s federal estate and gift tax exemption to the surviving spouse. The applicable exclusion amount for the surviving spouse is the sum of the survivor’s basic exclusion amount and the deceased spouse’s unused basic exclusion amount or DSUE. In order to claim the DSUE for gift tax purposes during the surviving spouse’s lifetime or for estate tax purposes when the survivor dies, the surviving spouse must make a portability election on a timely filed estate tax return when the first spouse dies.
For the first half of the new decade — with some basic planning and a portability election — a married couple may be able to transfer approximately $23 million without triggering any federal estate tax for their heirs.1 Without the threat of federal estate tax liability, achieving a step-up in cost basis for assets owned (i.e., eliminating capital gains for income tax purposes) when both the first and second person of a married couple dies has taken on even more importance.
Let’s look at a few couples and how they might structure their estate plan heading into the new decade.
Joe and Amanda
Joe and Amanda have a combined net worth of approximately $10 million (less than one basic exclusion amount). In deciding how their assets should pass to the survivor upon the first spouse’s death, they may consider: (1) making an outright transfer to the surviving spouse or (2) making a transfer to a trust for the benefit of the surviving spouse. In this scenario, transfer taxes are not the driving factor but avoiding additional capital gains taxes for family members are of concern.
If Joe and Amanda favor simplicity and are comfortable with the surviving spouse having control over all of their wealth, an outright gift to the spouse may work best to achieve a step-up in basis of the assets at both first and second death.
However, Joe and Amanda might choose to use a trust for the benefit of the surviving spouse for reasons that include (1) a desire of the first spouse to die to control the disposition of his/her share of the assets after the surviving spouse dies, (2) providing for a trustee or co-trustee to help the surviving spouse manage the assets, and (3) reducing the exposure of the assets to creditors.
For Joe and Amanda, income tax planning should take precedence over estate tax planning and getting a step-up in basis on assets at first death and second death should take priority. If the transfers are made to a trust for the benefit of the surviving spouse, the trust should be structured as the type of trust in which assets are included in the survivor’s estate and get an additional step-up in basis upon the second spouse’s death.
Regardless of whether an outright gift or transfer in trust for a spouse is made, at first death, the survivor should consider a portability election because it is possible that in the future the basic exclusion amount could be reduced, or the estate of the survivor could grow above the one basic exclusion.
Dan and Fred
Dan and Fred have a combined net worth of approximately $15 million (more than one basic exclusion amount but less than two basic exclusion amounts). Dan and Fred will need to do some planning to ensure that their heirs do not pay estate tax when the second spouse dies. They may consider (1) making an outright transfer of assets to the surviving spouse with the expectation that the surviving spouse will make a portability election or (2) making a transfer to a bypass trust for the benefit of the surviving spouse.
Before portability became an option, the use of a bypass trust was a standard feature in many couples’ estate plan. With a bypass trust, a surviving spouse can have lifetime access to the income and to the principal of the trust for health, maintenance, support, and education. At the survivor’s death, the value of the bypass trust including all appreciation is not included in the survivor’s estate for estate tax purposes. However, the assets in the bypass trust do not receive a step-up in basis when the survivor dies. If there is a substantial age difference between Dan and Fred and/or assets owned by the surviving spouse are expected to appreciate substantially before the surviving spouse’s death, Dan and Fred may strongly consider using a bypass trust.
On the other hand, if Dan and Fred do not expect their net worth to grow significantly and are comfortable with the surviving spouse having control over all their wealth, an outright gift to the spouse with a portability election may be preferable. Or, just like Amanda and Joe, they could choose to use a trust for the benefit of the surviving spouse, in which the assets are included in the survivor’s estate and get a step-up in basis at second death.
Harry and Helen
Harry and Helen have a net worth of $60 million. Their estate planning world has not changed. Pre-ATRA and pre-TCJA estate planning strategies are still very appropriate, but they should also consider more advanced estate planning techniques to minimize the amount of estate tax due, such as grantor retained annuity trusts, qualified personal residence trusts, and sales to intentionally defective trusts.
Estate plans are meant to be reviewed approximately every five years or when changes in tax laws occur. Focusing attention on current tax laws and tax-saving strategies and knowing that additional changes can be made when appropriate is generally a winning estate planning strategy.
Please contact your Cerity Partners advisor, estate planning attorney, or accountant to discuss these strategies in more detail.
1. A number of states and the District of Columbia have their own estate or inheritance tax. Many states have lower exclusion amounts than the federal government and most of these states have not adopted a portability provision.
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Meet the Author
Judy is a Principal based in the Silicon Valley office. She provides consulting advice for private clients and advisors on estate planning, wealth-transfer strategies, d trust and estate administration, and charitable planning. With her extensive law background, Judy works collaboratively with clients and their tax advisors and estate planning attorneys to ensure that their strategies are consistent with their overall financial and estate plans and to manage, preserve, and grow their wealth for their family and philanthropic goals.
Prior to joining Cerity Partners, Judy worked as an Estate Planning Advisor at B|O|S and served as a member of the Financial Planning Team. In this role, Judy helped clients navigate significant life changes, minimize their tax burden, and identify goals and strategies for legacy planning. Prior to joining B|O|S, she enjoyed a 35-year legal career in sophisticated gift and estate tax planning, charitable planning, and probate and trust administration.
Judy earned her Bachelor of Arts in Psychology from the University of Florida and her Juris Doctor degree from Georgetown University. She also received her Master of Laws from New York University.