Steve Akers
Martin Shenkman   Steve Akers
Planning for Single Taxpayers and Married Couples Is Different, Depending on Net-Worth Levels

Here’s why.

February 16, 2012
by Martin Shenkman, CPA, PFS and Steve Akers, JD

As taxpayers and advisers endeavor to understand the planning implications of the Tax Relief, Unem­ployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA), it will prove helpful to evalu­ate, as suggested in chapter 7, the effects from different perspectives. This article evaluates the TRA from the perspective of a taxpayer’s net worth. Many taxpayers will likely react to the 60-second website or tele­vision newscast sound-bite touting that if their worth is under $10 million, they don’t need to consider estate taxes. That is quite a dangerous assumption. But, determining what is practical for each taxpayer will clearly vary based on wealth, current or likely marital status, and the state of domicile. As with all discussions in this book, bear in mind that the law was only just passed, so new ideas and clearer under­standings of the implications of TRA will all come out in time. Read with caution.

Approximate ranges of wealth are used because of the uncertainty about how that wealth will grow in the future. Obviously, a taxpayer age 85 with a $4.5 million estate may view the likelihood of the growth of his or her estate above $5 million as less likely than a 45-year-old person with the same wealth. On the other hand, the younger taxpayer may view the risk of 2013 bringing an adverse estate tax change with less worry because he or she might consider that there will be time to plan then. The 85-year-old taxpayer may view the risks of 2013 bringing a harsher estate tax system with more concern.

A key hurdle in moving any taxpayers forward with planning is their potentially viewing their advis­ers like the little boy who cried wolf. Advisers all encouraged clients to plan because estate tax repeal would never happen. It did. Advisers encouraged their clients in 2010 to plan before grantor retained annuity trusts (GRATs) were assuredly going to be eliminated. They weren’t. Advisers all encouraged their clients to take advantage of planning opportunities before 2011 brought a $1 million exclusion and 55 percent rate. It didn’t.

Single or Nonmarried Taxpayers — General Comments

A single taxpayer and, for these purposes, a non-married couple will not have the benefit of two $5 mil­lion exclusions. Portability will provide no tax savings if there is no spouse who can make his or her un­used exemption available. There is also no spouse to join in making gifts (gift splitting) to maximize the use of the annual gift exclusions. These are the amounts which a taxpayer can give each year to any donee without gift tax consequences.

No marital deduction exists on the first death, so the opportunity to defer an estate tax that a married couple can choose does not exist.

If the single or non-married taxpayer has a partner who he or she wishes to benefit, it has always been advisable to fund a trust for that partner to avoid having the assets of the first-to-die partner added to and growing in the estate of the surviving partner. Many non-married couples, looking at the large $5 million exclusion, might view the cost and formality of establishing a trust as not worthwhile. This could prove a significant mistake. Consider the following scenarios:

The trust will protect the assets from claims and mismanagement, including challenges by family and others who might have disapproved of the relationship and who view themselves as appropri­ate heirs:

  • State estate tax could be an important factor. New York as an example, will tax all assets above $1 million.
  • The assets could grow after the death of the first partner and be removed from the estate of the surviving partner.
  • In 2013, if Congress doesn’t act, there will be a $1 million exclusion.

Married Taxpayers — General Comments

The availability of the marital deduction should be understood in the new TRA context. It provides a dif­ferent and more powerful benefit than the marital deduction under prior law because of inflation index­ing. Under prior law, if assets were owned by, or bequeathed to, the surviving spouse, that spouse would have to address planning if the assets would grow in value beyond his or her estate tax exemption. The TRA inflation indexes the $5 million estate tax exclusion. Many, perhaps even most, older taxpayers in retirement are in a spend-down mode whereby their earnings postretirement decline or are eliminated and they live off the earnings, and if needed, the principal, of their savings. Many retirees will invest in a manner that is more conservative than pre-retirees. They will often invest to protect their principal and generate cash flow (income). The growth of their savings is likely to be slower, if not negative. Thus, the inflation-adjusted estate exclusion may help minimize the estate tax faced by the surviving spouse.

Married taxpayers can use gift splitting in case one spouse has substantial assets but the other spouse does not have excess assets for making gifts. For a married couple, both can make gifts of $13,000 per year (plus direct payments of qualified tuition and medical expenses for anyone they seek to benefit). If one spouse has substantially larger assets, that spouse can make the gifts, and the less wealthy spouse can join in the gifts. Over time, an aggressive gift program can dampen estate growth and even be used to erode estate value thus reducing the likelihood of future estate taxes.

Planning for taxpayers of varying wealth levels and other factors needs to be reassessed in light of the TRA changes. Every taxpayer should review his or her plan, existing documents, and determine what changes are appropriate. Caution should be exercised for all wealthy clients because the TRA generosity may prove to be no more than a short-lived two-year vacation from a harsher estate tax.

This article has been excerpted from Estate Planning After the Tax Relief and Job Creation Act of 2010: Tools, Tips and Tactics. You can purchase the book at www.cpa2biz.com.

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Martin M. Shenkman, CPA, MBA, PFS, AEP, JD, is an attorney in New Jersey and New York City. His practice concentrates on estate and closely held business planning, tax planning and estate administration.Steve R. Akers, JD, is an attorney with 33 years of experience in estate planning and probate law matters. He is a managing director at Bessemer Trust. Editor Note: The authors are donating 100 percent of the royalties from this book’s sales to the following three foundations: Michael J. Fox Foundation for Parkinson’s Research, National Multiple Sclerosis Society and the Association of Hole in the Wall Camps.

* The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and closely held entities. The Personal Financial Planning Section is open to all Regular Members, Associate Members and Non-CPA Section Associate Members of the AICPA. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist Credential holder. Visit www.aicpa.org/PFP to learn more.