Building Creative and Flexible Wealth and
Estate Planning Solutions for Your Clients in
The signing of the American Taxpayer
Relief Act of 2012 (“ATRA”) on
January 2, 2013, certainly marked a
transition for wealth and estate planning
professionals and their clients. Before
ATRA, planning was often dominated
by the volatility and uncertainty of the
federal estate, lifetime gift, and
generation-skipping transfer (GST) tax
exemptions (referred to collectively as
federal transfer tax exemptions).
Volume 9, Issue 1
From Steven Silverman
Steven Silverman, Esq.
9500 S. Dadeland Blvd.
Miami Florida 33156
ATRA, by setting a “permanent” combined exemption of $5 million adjusted for inflation
from 2010 and providing estate tax exemption “portability,” made federal transfer tax
planning irrelevant for the vast majority of Americans (barring future Congressional
action). On the other hand, income tax planning has become vastly more important for
many of your clients. ATRA instituted a new 39.6% top bracket and a 20% capital gains
rate for the highest income taxpayers plus personal exemption and itemized deduction
phaseouts January 2013, were surtaxes in the Affordable Care Act (ACA) on earned
income (0.9%) and net investment income (3.8%) that affected many more taxpayers (a
$250,000 married filing jointly threshold).
Turning away from federal transfer tax planning has allowed clients to turn toward other
things that have always made estate planning important – actions such as mitigating risks
of incapacity, asset protection, and protecting beneficiaries from unwise financial
decisions. For many clients, this refocus is happening now, as they confront the reality of
their 2013 income tax liability. As we look to the beginning of a new year, there are
abundant opportunities and a few challenges – some of them familiar and others quite
Higher top income tax brackets, higher capital gains tax rates, personal
exemption/deduction phaseouts, and the ACA surtaxes make income tax planning a
significant opportunity under ATRA.
Delaware and Nevada Incomplete Non-Grantor (“DING” and “NING”) trust
strategies can reduce combined tax rates for some clients by eliminating state-imposed
taxes on trust income and sales of appreciated trust assets.
Stand-alone Retirement Trusts (“SRTs”) can help protect beneficiaries’ inherited
interests in retirement accounts.
Asset protection trust strategies are available to shield clients’ assets from attack
by future litigation and other creditors.
Estate plans should be updated to provide flexibility in marital deductions to
achieve capital gains leverage and deal with mismatches between state and federal estate
Planning in 2014 and beyond offers opportunities to guide clients to creatively and
flexibly meet their long-term goals.
Take advantage of favorable state laws: Reducing income taxes and preserving
Under ATRA, the top bracket income tax rate on the highest income families jumped
from 35% to 39.6%. Plus, taxes on their long-term capital gains rose a full third, up from
15% in 2012 to 20% in 2013 and beyond. Wealthy families are also subject to phaseouts
of their personal exemptions and itemized deductions. As a result, clients are turning
attention from estate tax strategies that will help future generations to income tax
strategies that will provide relief today.
One solution some clients can turn to is the so-called “DING” and “NING” trusts that
reduce the impact of state-imposed taxes on investment income and long-term capital
ING is an acronym for “Incomplete Non-Grantor.” Asset protection trusts drafted under
the laws of Delaware (DING) or Nevada (NING) can be irrevocable and yet incomplete
for federal transfer tax purposes. The client establishes the DING or NING trust and then
transfers to it income producing and/or appreciated assets, such as founder’s stock in a
successful small business. For clients in states that impose income taxes, DING and
NING trusts can provide significant income tax avoidance and asset protection benefits.
What You Need to Know: Because neither imposes a state income tax, any ordinary or
capital gain income in a Delaware or Nevada irrevocable trust is not subject to state
income tax. And because both Delaware and Nevada are strong jurisdictions for
protecting assets in self-settled trusts from asset attacks by creditors, DING and NING
trusts can significantly help a family protect its wealth.
Protect inherited IRAs from spendthrifts and creditors
Last April, In re: Clark (7th Cir. 2013) raised new concerns about whether an inherited
interest in an IRA is protected from the beneficiary’s bankruptcy creditors. In Clark, the
Seventh Circuit said no. The Fifth and Eighth Circuits previously had said yes (Chilton
and Nessa). The Supreme Court has accepted an appeal from Clark and may or may not
settle the conflict.
Regardless of what the Supreme Court decides, the “Stand-alone” Retirement Trust
(“SRT”) remains an important planning tool because the greatest risk to inherited
retirement account interests is the premature withdrawal of funds by the beneficiary.
When the account holder dies, the account custodian makes distributions to the trustee of
the SRT, which is administered according to the trust’s terms.
Care must be used – both in the SRT itself and in the beneficiary designation – to ensure
the SRT qualifies as a “designated beneficiary,” allowing the account distributions to be
stretched over the life expectancy of the oldest beneficiary (thus maximizing the
account’s tax deferred growth). This stretch is especially beneficial with Roth accounts,
for which all growth and distributions are tax free.
What You Need to Know: When structured properly, the SRT not only stretches out the
plan benefits, it also provides substantial asset protection for the trust beneficiaries and
can help beneficiaries grow into their inheritances responsibly.
Build flexibility into marital deduction planning: State exemptions and capital gains
For now, the higher federal estate tax exemption means the federal estate tax is a nonissue for most clients. However, many, if not most of their estate plans, were created
during a time of lower federal estate tax exemptions and/or less certainty. Many of them
certainly predate the concept of estate tax exemption “portability,” which first became an
option in December 2010 and was made permanent under ATRA.
The end result is that many married clients have estate plans that force division of the
estate into an estate tax exempt (“bypass” or “credit shelter”) trust when the first spouse
dies. Not only is this unnecessary tax planning for most families; it can cause highly
When the first spouse dies, assets that were placed in a traditional bypass or credit shelter
trust, while exempt from later estate tax, will be subject to capital gains taxes when sold.
That gain is determined by comparing net sale price to the asset’s value when the first
spouse dies. For couples who have assets that are prone to significant growth, or for
surviving spouses who are fairly young, this may mean a hefty capital gains tax bill their
beneficiaries won’t be happy about. Planning techniques are available that avoid the
capital gains tax hit to the couple’s beneficiaries by including the assets in the surviving
spouse’s estate and providing asset protection for the surviving spouse.
With the new federal estate tax exemption, it’s important to also plan with state estate
taxes in mind. Fifteen states and the District of Columbia impose a state estate tax. If
your state is not one of those jurisdictions, your client might move to one. As of today,
only two of the sixteen track the federal exemption. The others have exemptions that
range from $4,000,000 on the high end (Illinois) to $675,000 on the low end (New
Jersey). Maximizing the estate tax deduction on the first spouse’s death requires two
bypass trusts. Most plans don’t do that.
What You Need to Know: In an increasingly mobile culture, clients who, even if they do
not currently live in a jurisdiction that imposes an estate tax, may later move to a
jurisdiction that does.
Planning in 2014 and beyond requires creativity and flexibility
One lesson to take from 2013 with ATRA’s new exemptions, rates, and the ACA’s
surtaxes is that plans built with flexibility will be far superior to those that are not.
Another lesson is an outdated plan is a family’s disaster waiting to happen. 2014 is a year
of opportunity to guide clients through the confusion of higher income tax rates,
challenges and opportunities in state law, and other changes, to help them protect what
they have worked a lifetime to build.
Actions to Consider:
Meet with your legal, tax, and investment advisory team to identify strategies best
suited to address today’s new estate and income tax environment for your clients.
When considering tax strategies, clients should look forward two to three years to
understand the combination of income, trust, and investment cash flows.
Expect that the tax code will continue evolving, and build flexibility into your
clients’ plans using modern trusts as a core tool.
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained
in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of
avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek
advice from their tax adviser based on the taxpayer's particular circumstances.
For professionals' use only. Not for use with the general public.
You have received this newsletter because I believe you will find its content valuable, and I hope that it will help you to provide better service
to your clients. Please feel free to Contact Me if you have any questions about this or any matters relating to estate or wealth planning.
Steven Silverman, Esq. 9500 S. Dadeland Blvd. Suite 550 Miami Florida 33156 Website