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Rubin Hay PC Law Blog

Tuesday, January 26, 2016


Dear Clients and Friends:

We provide this advisory to inform you of three planning opportunities:


The American Taxpayer Relief Act of 2012 unexpectedly sets the exemptions for estate, gift and generation-skipping tax at $5 million per person, indexes those exemptions for inflation, provides a fixed tax rate (40%) and allows portability of a deceased spouse’s exemption.

However, on April 10, the Obama administration’s 2014 budget proposal and the companion Treasury Department Greenbook propose returning estate, gift and generation-skipping tax exemptions and rates to 2009 levels (45% tax rate, a $3.5 million estate and generation-skipping tax exemption and $1 million lifetime gift tax exemption, both indexed for inflation). Absent Democratic control of the House of Representatives after the 2014 elections, Congress will not likely adopt these proposals.  The White House proposal would grandfather transfers made prior to date of enactment.

Planning Opportunity 1:  Portability

Portability of a deceased spouse’s federal estate tax exemption permits the surviving spouse to take advantage of the unused federal estate tax exemption of the first spouse to die, with certain exceptions.  Common practice has been for the estate of the first spouse to establish a credit shelter or bypass trust, often referred to as a Family Trust, to protect the federal estate tax exemption and the $1 million Massachusetts estate tax exemption of the first spouse to die in a trust for the surviving spouse to minimize the estate taxes in the estate of the surviving spouse. 

While such planning should save Massachusetts estate taxes under the new law, there is a potentially significant income tax cost relating to the tax basis of the protected property.  Tax basis is the tax cost that is subtracted from the selling price in determining capital gain.  Since assets included in a taxable estate receive a step-up in basis under current law equal to the date of death value, capital gain on appreciated assets sold after death is avoided.  However, assets held in a Family Trust designed to avoid Massachusetts estate tax in the second estate will not receive a step-up in basis upon the death of the surviving spouse.  In many cases the step-up in basis will be more advantageous than avoiding the Massachusetts estate tax on the Family Trust in the second estate. 

Utilizing the new portability rules may be more advantageous for many families. For this reason, we are changing our funding formulas in living trusts to permit the executor/trustee to take a second look at the time of the death of the first spouse to determine whether it is more beneficial to avoid Massachusetts estate tax in the second estate or receive an income tax step-up in basis on the appreciated assets that otherwise would be included in a Family Trust.  Most trusts for married couples based on the prior law do not offer this flexibility.  Clients desiring this flexibility should consider modifying their trusts. 

Planning Opportunity 2:  Probable Loss of Family Discounts 

In planning for significant lifetime gifts it is always desirable to take advantage of the discounts for minority interests and lack of marketability permitted under the tax law that often produce valuation discounts of 30% to 50% in calculating the value of a taxable gift.  Strategies for obtaining family discounts using limited partnerships and transferring fractional interests and minority interests are utilized to significantly reduce the value of lifetime gifts. 

Each year the Obama administration and the Treasury Department have proposed to restrict or eliminate valuation discounts for transfers of interests in family-controlled entities.  Also, the Treasury Department has long maintained that Internal Revenue Code Section 2704 gives it authority to disregard such valuation discounts without Congressional action but to date, Treasury has not issued regulations to do so.

Quite surprisingly, for the first time in many years, there is no proposal in the 2014 White House Budget or Treasury Department Greenbook to limit or curtail such discounts.  The absence of this proposal in the White House budget and Treasury Department Greenbook may well portend the issuance of proposed regulations to limit family discounts.  It is also clear that President Obama is strongly advocating that his departments utilize extensive regulatory actions and bypass Congress.

The elimination of family valuation discounts would substantially affect many planning techniques used when transferring family wealth.  Last winter, to take advantage of the then federal tax law, we planned and implemented significant gifting for many clients.  In every case we employed valuation discounts to enhance the value of the wealth that was transferred. 

Since the IRS has maintained that it does have authority to significantly curtail valuation discounts by regulation and since President Obama has promulgated aggressive and extensive regulatory action that can be effected without the consent of Congress, we believe that the absence last month of a proposal to limit inter-family valuation discounts by the White House and Treasury may signal that the IRS is in the process of proposing regulations to obtain this result.

Clients considering wealth transfers should consider accelerating their planning with this in mind.  Treasury regulations are typically effective on the date of promulgation.

Planning Opportunity 3:  Spousal Lifetime Access Trust

Spouses typically wish to provide for one another before providing for other beneficiaries.  Often clients want to take further action to reduce the potential estate taxes in their estates but do not want to relinquish their income or right to principal.  By creating a spousal access trust (“SAT”) for each other utilizing the elevated gift tax exemption, spouses can accomplish this goal.

Rather than establish a trust directly for children or other beneficiaries, one spouse can establish a trust for the other in which the beneficiary spouse is the beneficiary for their lifetime.  The beneficiary spouse can be a Trustee.  When brokerage accounts, shares in the family business or real estate entity are transferred to a SAT, the income and the principal can be distributed to the beneficiary spouse and thereby continue to be available to both spouses.

On the death of the beneficiary spouse, without the imposition of estate tax the trust can be held for the next generation of beneficiaries and distributed to them or continued in a multi-generational trust. Alternatively, the SAT can be structured to permit the transferor spouse to be added later as a beneficiary of the SAT.

Clients with estates that may be subject to the federal estate tax, after taking appreciation into account, should consider whether a SAT is an appropriate tax planning vehicle for them.  Utilizing SATs permit a couple to lock in the use and benefit of the new federal gift tax exemption in case it is reduced in future years and preserve family wealth.

Rubin, Hay & Gould, P.C.             

Estate Planning Group:

Merek S. Rubin                 

Christopher J. Mahoney

Circular 230 Disclosure:  IRS Circular 230 requires that we inform you that any federal tax advice included in this communication is not intended to be used, and may not be used, to avoid tax related penalties or to promote, market or recommend to another party any tax related transaction or matter addressed herein.

This Client Advisory is for information purposes only and should not be construed as legal advice on any specific facts or circumstances.  Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.

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| Phone: (508) 875-5222
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| Phone: (617) 618-9160

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