Planning After ATRA: The CPA s Guide to Financial and Estate Planning Portability A Planning Game-Changer But Not as Simple as It Appears

Transcription

1 Planning After ATRA: The CPA s Guide to Financial and Estate Planning Portability A Planning Game-Changer But Not as Simple as It Appears Presented by: Steven G. Siegel, JD, LLM 1

2 Introduction About the PFP Section & PFS Credential The AICPA PFP Section provides information, resources, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and their closely held entities The CPA/Personal Financial Specialist (PFS) credential distinguishes CPAs as subject-matter experts who have demonstrated their financial planning knowledge through experience, education and testing 2

3 Introduction Steve G. Siegel, JD, LLM The Siegel Group 3

4 Agenda What is portability? What is portability intended to accomplish? Application Election Determining DSUE Form 706 Advantages/disadvantages What to tell clients about planning? Sophisticated planning strategies 4

5 What is portability? Allows the estate of a decedent who is survived by a spouse to make a portability election to transfer the decedent s unused federal transfer tax exclusion (referred to as the deceased spousal unused exclusion amount or DSUE ) to the surviving spouse so that the surviving spouse may then use the DSUE obtained from the deceased spouse to address the survivor s own transfers during life and at death The American Tax Relief Act of 2012 ( ATRA ) makes permanent portability between spouses In the 2014 Budget Proposals of the Obama Administration, there are provisions presented to reduce other permanent parts of ATRA but no proposal to change the portability provisions 5

6 What is portability intended to accomplish? Creates fairness between those people who plan their estate and those who fail to do so Designed to eliminate the need to many married couples to retitle assets and the need to force the creation of complex trusts No applicability to a decedent who died prior to Jan. 1, 2011 Basic exclusion amount indexed for inflation; DSUE not indexed for inflation Unused GST tax exemption of predeceased spouse is not portable State death tax exemptions have not been made portable. 6

7 Portability applies to The unused exclusion of the last decease spouse. If the last deceased spouse has no unused exclusion available, the surviving spouse gets no benefit from portability the unused exclusion of an earlier deceased spouse cannot be used in such a case, and is irrevocably lost. A surviving spouse may use the predeceased spouse s DSUE in addition to such surviving spouse s own 2013 $5,250,000 exclusion for transfers made by the surviving spouse either during lifetime or at death. Can late elections be forgiven and corrected later? 7

8 Portability election Portability is not automatic. Election must be made on a timely filed federal estate tax return (Form 706) (including extensions) filed for the estate of the predeceased spouse, regardless of the size of the gross estate. Form 706 due 9 months after decedent s date of death. Requests for automatic extension must be filed before Form 706 due date using Form Not filing timely effectively prevents portability election. 8

9 Should small estates file Form 706? Tendency is to not make election. There is a cost involved. What if the surviving spouse receives a windfall? If the windfall does occur, and if no portability election was made, might the representative of the estate of the first decedent be sued for negligence by the heirs of the second spouse to die? What if the surviving spouse remarries a wealthy person? What about the other advisors of the decedent s estate and the surviving spouse? Filing Form 706 will require more filings of federal estate tax forms. 9

10 How is the DSUE determined? Starting point Was any of the exclusion used by the last deceased spouse? Remarriage If the surviving spouse remarries, the DSUE will still be available to the surviving spouse as long as his or her new spouse is living. If the surviving spouse remarries and divorces, the later death of the new (and divorced) spouse will not destroy the DSUE from the first deceased spouse. Order of transfers If a surviving spouse who has a DSUE makes a taxable gift, the DSUE is applied first. If a surviving spouse uses the DSUE of the first decedent spouse, remarries, and then the new spouse dies with DSUE, the surviving spouse has a new last deceased spouse. 10

11 Statute of limitations IRS has unlimited statute of limitations to resolve a DSUE claim. Requirement of record preservation by executor Adequate disclosure rule does not apply DSUE Amount reported on the earlier Forms 706 for the predeceased spouse(s) of the surviving spouse can be adjusted, but additional tax on the earlier Forms 706 can be assessed only within the normal statute of limitations period. 11

12 Who is responsible for electing portability? If an executor or administrator is appointed then only such fiduciary may file a Form 706 to elect portability (or to opt out). If there is no appointed executor, any person in actual or constructive possession of any property of the decedent may file the Form 706 to elect portability. 12

13 Caution: Angry or Vindictive Executor If the executor of the first spouse to die is resentful of the surviving spouse, he or she may choose to ignore the portability opportunity to deny the additional tax saving in the future estate of the surviving spouse. 13

14 Form 706: Special Rules There is a special rule for smaller estates not otherwise required to file Form 706: Estates need only report the property description, ownership, and/or beneficiary of such property, and all other information necessary to establish entitlement to the marital or charitable deduction. Treas. Reg T(a)(7)(ii)(A) The executor must estimate the total value of the gross estate based on a determination made in good faith and with due diligence. The executor may end up estimating the estate s total value, rounded to the nearest $250,

15 Form 706: Special Rules If a complete and properly prepared return is filed, the portability election is deemed made. The Regulations require the executor to make an affirmative statement on the Form 706 to opt out of portability. Not timely filing a Form 706 will also be considered such an affirmative statement opting out of portability. 15

16 Revised Form 706 for Deaths for steps calculation to show the DSUE amount being portable from the decease spouse to the surviving spouse Part 6 has been revised. Mandates the simplified approach when the estate is below the otherwise required filing threshold Problem: How, then is the reverse QTIP election made where the estate of the first decedent is below the basic exclusion amount, but there is a desire to use the generation-skipping transfer tax GST exclusion of the first spouse to die? Solution: The IRS says to use the standard rules for filing Form 706 when a reverse QTIP is desired. 16

17 Revised Form 709 for Gifts for 2012 Schedule C, Decease Spouse Unused Exclusion (DSUE) Amount Assuming the executor of the last deceased spouse of a surviving spouse elected portability, the surviving spouse can use the DSUE of that spouse as an additional gift tax exclusion 17

18 Advantages/Disadvantages of Portability Simplification Eliminates for many married people the need to divide their assets and hold them in the separate names of the spouses. Its use will provide a stepped-up basis in the assets left to the surviving spouse which remain unspent at the surviving spouse s death. Portability may eliminate for many families the use of a bypass (credit shelter trust). Retirement plan roll over Planning for states with independent death taxes Be careful of planning that directs an entire estate to pass to a credit shelter trust; it may result in a very substantial state estate tax at the death of the first spouse to die. Be careful of ignoring the presence of a state death tax exclusion at the first death of a married couple, which tax liability could have been avoided if the state death tax exclusions were used at each death. 18

19 Is the simple plan the better plan? More control over property to surviving spouse Advantage for some families; disadvantage for others Issues of asset protection, management, protection from future spouses For blended families, the simplicity of portability election may be outweighed by the protection of the bypass trust at the first death. 19

20 The Dilemma: Appreciation/Inflation protection vs. basis step-up advantage Higher income tax basis and potentially reduced capital gains are valuable planning opportunities. Using the credit shelter bypass trust gets a basis step-up at the first death, but not at the second death. 20

21 Case studies: What to tell the clients about planning Married Couple Has Assets Well Under the Exclusion Amount Married Couple with an Estate Greater than One Possibly Greater than Two Exclusion Amounts Estate Planning for Legalized Same Sex Marriages 21

22 Sophisticated planning strategies Address the appreciation concern without losing the step-up in basis Consider using portability, and then having the surviving spouse take the assets with the greatest appreciation potential and use them in conjunction with a defective grantor trust to be created by the surviving spouse. Another method to use to address the concerns about appreciation and the desire for the double basis step up issue is to use a credit shelter trust and plan it so that the Delaware tax trap can be triggered by the surviving spouse to cause the trust assets to be includable in the surviving spouse s gross estate. 22

23 Conclusions Portability is without question a huge gamechanger in estate planning for many clients. The concern is that people will overlook some of the traditional safe harbors that trusts at the first death provide. Portability comes with another risk that despite its benefits, it will be ignored or rejected by many it is most designed to help if there is a refusal to authorize the filing of a Form 706. For the large estates, the credit shelter bypass trust remains a good recommendation. The bottom line conclusion here is that portability is a case by case determination. 23

24 Questions? 24

25 PFP Section Resources (aicpa.org/pfp) The CPA s Guide to Financial & Estate Planning Volumes 1-4 Planning After ATRA and the Medicare Surtax Toolkit: aicpa.org/pfp/proactiveplanning Forefield Advisor (aicpa.org/pfp/forefield) Client education and communication tool Written by CPAs, attorneys and other subject matter experts. More than 3,000 resources covering personal financial planning, including estate, tax, retirement, investment and risk management planning. Keyword searches: American Taxpayer Relief Act, portability AICPA Advanced Personal Financial Planning Conference (cpa2biz.com/pfp) January 20-22, 2014 in Las Vegas 2-day session (Jan 18-19) for those in earlier stages of PFP o Implementing PFP Services: Step by Step Plans for Success For the full calendar of upcoming PFP Section events, visit and click on CPE & Events. 25

26 Upcoming PFP Section Web seminars Register now for these events: More from this series: - Business Succession Planning After the American Tax Relief Act of 2012 (October 31, 1:00-2:45p.m. ET) - Taxation of Divorce (November 21, 1:00-2:45p.m. ET) What CPAs Need to Know About Insurance Planning for Individual Clients (September 25, 1:00-2:45p.m. ET) Why Most Arguments For or Against Active & Passive Investment Management are Wrong (October 17, 1:00-2:15p.m. ET) Strategies for Pre-Retirees & Retirees to Not Outlive Their Money During Times of Below-Normal Market Conditions (October 24, 1:00-2:15p.m. ET) Trust Situs for Dynasty Trusts & DAPTs (November 15, 1:00-2:45p.m. ET) For the full calendar of upcoming PFP Section events, visit aicpa.org/pfp and click on CPE & Events. To access the archives, visit aicpa.org/pfp/webseminars. 26

27 CPA/PFS News and Events PFS Referral Program Receive 100% credit to apply toward future CPA/PFS dues by referring a CPA to become a PFS or sit for the PFS exam PFS Exam Registration open for winter window Discounts, sponsorships and volume pricing available Education Opportunities Live 2 ½ day review class 3 locations in Oct/Nov: OH, AZ, GA In-depth courses in estate, retirement, tax, investments, insurance, and PFP process Self-study PFS exam review course Learn more at aicpa.org/pfp/pfs 27