Amy Vos – Case Coordination and Support
Estate planning is changing as tax laws are changing. Factors that impact the decision to use a lifetime gift or include as an asset in an estate during estate planning decisions include:
(1) Asset basis
(2) Appreciation/ Growth Potential
(3) State Taxes
Below is further detail on how these factors affect estate planning decisions, and how Life Insurance can be used as a piece of the plan.
Taxes
There has been a recent increase in federal and state taxes on income. Therefore, the issues to consider when estate planning now not only include transfer taxes , but also federal and state income and capital gains taxes and the new federal Net Investment Income Tax (NIIT). When looking at income taxes to be paid on an estate after all taxes are added, the total long-term capital gains tax rate can be 37.1%+, and the total short-term capital gains tax rate can reach up to 56.7%. With this said, there are times when estate tax inclusion would yield the lowest paid taxes on an estate, but there are also times when lifetime gifting would produce the highest worth retained.
Asset Basis
To accurately determine the tax impact of an asset, the basis must be calculated correctly. For a property, the general rule with lifetime gifting and spousal transfer is carry-over basis. In estate inclusion at death, the basis of a property is generally stepped-up to current fair market value and no capital gains taxes are due. The property is then included in the descendants estate. There are exceptions to every rule, so refer to your advisor for advice specific to your situation.
Appreciation
Lifetime gifting of an asset should be considered as an option when the asset has a low basis and high appreciation or growth potential if:
• The client is in a low income tax bracket;
• Lives in a state with low income tax;
• Lives in a state with no gift tax and a high estate tax rate or low estate tax exemption;
• Life Insurance or a tax-planning vehicle such as an installment sale to a grantor trust or charitable remainder trust is in place to offset estate taxes.
Assets with low basis and high appreciation or growth potential should also be considered as an option to be included in an estate when estate planning if:
• The client has not used his/her estate tax exemption (can obtain a stepped-up basis at death);
• The asset is in a properly executed long-term trust;
• Life Insurance that held in a properly structured irrevocable trust is in place to offset estate taxes.
If the assets have little unrealized capital gain with a high basis and low appreciation, they could be used in lifetime gifting. If there is an anticipated sale during the client’s life of a highly appreciated asset with low basis, lifetime gifting would also be an option to consider if Life Insurance or another vehicle to transfer assets is in place (installment sale to grantor trust or charitable remainder trust).
Insurance
Insurance can play a large role in estate planning. A properly structured Irrevocable Life Insurance Trust (ILIT) can provide funds to pay estate taxes so that highly appreciated assets can remain in a client’s estate to have a stepped-up basis upon death. Life Insurance can also be a source of funds to pay capital gains taxes and NIIT in a grantor trust. Life Insurance can also provide a benefit to a client’s family to replace assets if they are in a charitable remainder trust. If a long-term trust holds a family business where significant gain builds up, the beneficiaries of the trusts can get Life Insurance to recover the costs of capital gains and NIIT taxes.
Executive Benefits Network (EBN)
Whether our client is an owner of a bank or a company, Executive Benefits Network works with your advisor to devise solutions to potential estate planning issues using Life Insurance as a tool as an informal funding solution.
Source: WRMarketplace, AALU Washington Report; 18 June 2015