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Lexis Fed. Tax J. Q., Sept 2014 at ch. 2.


Estate planners are recalibrating their planning focus in response to recent tax modifications at the federal and state levels. The need to refocus planning emanates from changes wrought by recent federal tax acts, beginning in 20011 and ending in 20132 with enactment of “permanent” provisions which increase the basic exclusion amount for federal estate and gift tax and generation skipping transfer tax exemption to an inflation adjusted $5,340,000 as of 2014,3 institute the portability election for federal estate tax purposes,4 alter the transfer tax rate to essentially a flat 40 percent,5 and eliminate the state death tax credit in favor of a state death tax deduction for federal estate tax purposes.6 The impacts of these changes on estate planning techniques and estate planners prove significant. The number of total federal estate tax returns filed decreased from about 122,000 in 2001 to about 32,000 in 20137 indicating substantially fewer estates find it necessary to file and suggesting the need for planners to assess the possibilities for continued tax planning. An examination of the wealth transfer tax landscape as it has emerged requires planners to consider the impacts and planning opportunities remaining from many different angles and to flip the lens to consider federal wealth transfer tax, state estate and inheritance tax, and income tax burdens and opportunities. This article primarily explores the impacts of these recent changes on the continued effectiveness and use of lifetime transfers as a tax planning tool.

Among the many questions raised by these recently legislated changes is the question of whether and when lifetime transfers make sense for clients from a federal and state tax law perspective. In answering this question planners must take into account the impact of lifetime transfers on both federal and state estate taxes, and the associated impact of those transfers for purposes of federal and state income taxation. Statistics indicate that lifetime transfers remain a viable planning technique. The most recent statistics show federal gift tax returns filings decreasing from about 304,000 in 2001 to about 249,000 in 2012, with a jump in 2013 to about 313,00, likely a result of the uncertainty as to whether the increases in the applicable credit amount would in fact sunset.8 The following analysis repeatedly flips the lens to recalibrate understanding of the relative advantages and disadvantages of lifetime transfers in light of the new estate planning landscape.

This article begins by focusing on the continued viability of lifetime transfers in light of changing federal tax rates and exemption amounts, it then eyes the influence of state transfer taxation on lifetime planning opportunities. It analyzes the various opportunities and justifications for making lifetime transfers in light of the increase in exemption and the increasing focus on obtaining a step-up in basis, and it addresses many of the estate planning strategies suggested. A view of the horizon reveals that the answer to the question of whether lifetime transfers remain a viable planning tool depends in large part on the client’s overall wealth and state of domicile. What becomes clear from the analysis is that lifetime transfers remain an important planning tool in the quest to minimize wealth transfer taxation and obtain a step-up in basis.


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