When most people hear the term “Estate Planning” their thoughts seem to automatically focus on taxes. In the past, tax reduction has been the primary motivation for many of our clients to create an estate plan. However, the landscape has drastically changed over the past several years. This is primarily due to the passing of the American Taxpayer Relief Act of 2012 (ATRA), which permanently increased the federal estate tax exemption to over $5 million per person and the Ohio legislature’s decision to eliminate the Ohio Estate Tax in 2013. Yet, even with the benefit of these tax changes, proper estate planning still requires professional advice and is an important component of a comprehensive financial plan.
WHAT IS ESTATE PLANNING?
In simple terms, estate planning is the process of developing a written plan that, upon your death, will allow the individuals and entities of your choosing to receive what you want, when your want, and at the least cost, delay and inconvenience. A properly crafted estate plan will coordinate the various ways your assets can be transferred upon your death, namely: (1) titling ownership, such as using joint or individual owners; (2) the will, which is the standard method; (3) the living trust, which has several advantages over a will; and (4) by beneficiary designation, for assets such as retirement plans and life insurance. If you die without a will or living trust, Ohio’s intestacy laws will control who receives your property that doesn’t otherwise pass by joint ownership or through a beneficiary designation. Dying without a will or trust will also be likely to increase the costs and hassles involved in settling your estate.
The Ohio estate tax was eliminated for individuals dying after December 31, 2012. While ATRA made a number of important changes to the federal estate tax that impact estate planning. The two primary changes to the federal estate tax were permanently increasing in the federal estate tax exemption, and allowing for the portability of a Deceased Spouse’s Unused Exclusion Amount (DSUEA).
The federal estate tax exemption, which is indexed annually for inflation, is the amount an individual may pass on to his or her heirs at death free of the federal estate tax. For 2014 the exemption is set at $5.34 million, an increase from $5.25 million in 2013, meaning that the first $5.34 million of an individual’s estate is not subject to the federal estate tax.
Additionally, ATRA now allows a surviving spouse to utilize the unused portion of a deceased spouse’s estate tax exemption. This concept is referred to as portability. In the past, when the estate tax exemption was less than half of what it is now, estate planners commonly drafted special trusts, called A/B trusts or credit shelter trusts, to be certain that each spouse’s estate tax exemption was fully utilized. This was because the estate tax exemption use to be a “use it or lose it” proposition. But under ATRA, this is no longer the case. The law has now made it possible for a surviving spouse to carry over the unused portion of the estate tax exemption of the spouse who died and add it to their own. To take advantage of this option, the executor of the estate of spouse who died must file a federal estate tax return (even if no tax is due) and make the portability election.
The end result is that now married couples can now shelter as much as $10.68 million of net worth from the federal estate tax by simply leaving all of their assets to their surviving spouse and then making the DSUEA election by filing a federal estate tax return.
DO I STILL NEED A TRUST?
Even with the increase in the estate tax exemption becoming permanent and the portability of a spouse’s unused exemption now being available to taxpayers, trust planning still provides many non-tax benefits. Some of these benefits include:
- Probate avoidance
- Protecting immature or irresponsible beneficiaries
- Protecting against disgruntled spouses, creditors and others who may sue your heirs
- Preventing an evil stepmother or stepfather from disinheriting your children
- Planning for your grandchildren, as portability does not apply to the generation skipping transfer tax
After years of shifting sands in the estate planning world, things have finally settled down. Both planners and taxpayers have a much clearer picture of what planning strategies to utilize. Although estate tax planning is no longer the driving force for creating an estate plan, the traditional goals of ensuring that the proper people receive what you want, when you want, and at the least cost are still goals worth achieving.
Paul Kellogg is a lawyer with Phillips Law Firm, Inc., whose practice focuses on estate planning, probate and representing entrepreneurs and business owners. He can be reached at (513) 985-2500.