Planning Under ATRA

The American Taxpayer Relief Act of 2012 (“ATRA”) has given us a permanent set of estate, gift, and GST tax rules for the first time in more than a decade. ATRA provides that a couple can transfer up to $10.5 million without having to worry about their estate paying any estate taxes on the death the surviving spouse ($5.25 million per person).  ATRA also unified the lifetime gift tax exclusion amount to $5.25 million.

ATRA did not address any asset protection provisions dealing with your estate no matter whether or not it will be subject to estate taxes.  Unfortunately, some people only think of protecting their estate as it relates to estate tax and nothing else.

What will be some of the things that everyone needs to think about since approximately 99% of estates will not be concerned with estate taxes?  I will discuss two basic situations that will be part of future wealth preservation planning for the vast majority of my clients.

Portability. ATRA provides for a portability provision between spouses that allows the unused $5.25 million exclusion amount of the first spouse to die to be used by the surviving spouse on his or her death, for a total $10.5 million. Prior to 2011, in order for a married couple to assure this outcome, they used the A-B family trust on the death of the first spouse to transfer his or her assets into a nonmarital trust in order for it not to be taxed on the surviving spouse’s death.

The question for married couples will be: do they want to continue with this type of planning or not?  From an asset protection standpoint, the answer is yes since portability is merely an election on Form 706 for a deceased spouse’s estate return and not a separate marital or nonmarital trust.  There is no spendthrift protection with portability.  Everything goes outright to the surviving spouse with no restrictions or protection from creditors.  On the death of the surviving spouse the IRS can revisit the values reported on the deceased spouse’s Form 706.

Married couples will have to revisit these plans in light of the higher applicable exclusion amount to determine whether the form of nonmarital trust created will leave the surviving spouse with sufficient assets on which to live comfortably.

In mixed marriages with different children, nonmarital shares that are primarily for the benefit of the children and other descendants may need to be revised to include the spouse as a beneficiary. Alternatively, the size of the nonmarital trust for children and descendants could be capped at some arbitrary number, and a second nonmarital trust for the exclusive or primary benefit of the surviving spouse can be created.

Entity planning.  Depending on the nature of the assets that are owned by the family, corporations, limited partnership and limited liability companies are an excellent way of protecting family wealth.  When you combine entity planning with other types of assets protection vehicles, the asset protection planning can even have a more favorable outcome.

Prior to 2011, the creation of valuation discounts has become an integral part of estate planning for clients with potentially taxable estates. This may involve holding tangible assets as tenants-in-common or holding investment assets in a family limited partnership or limited liability company (LLC). Clients whose estate plans were prepared when the applicable exclusion amount was much lower than the present $5.25 million may need to reconsider whether such discount planning has become counterproductive.

Despite ATRA, protecting family wealth from creditors and preserving it should not be neglected.  It is just as important tod.