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The New Estate Tax Rules andYour Estate Plan

October 16, 2015

The Tax Relief, Unemployment InsuranceReauthorization, and Job Creation Act of 2010 (the2010 Tax Act) included new gift, estate, andgeneration-skipping transfer (GST) tax provisions.The 2010 Tax Act provided that in 2011 and 2012, thegift and estate tax exemption was $5 million (indexedfor inflation in 2012), the GST tax exemption was also$5 million (indexed for inflation in 2012), and themaximum rate for both taxes was 35%. New to estatetax law was gift and estate tax exemption portability:generally, any gift and estate tax exemption leftunused by a deceased spouse could be transferred tothe surviving spouse in 2011 and 2012. The GST taxexemption, however, is not portable. Starting in 2013,the American Taxpayer Relief Act of 2012 (the 2012Tax Act) permanently extended the $5 million (asindexed for inflation, and thus $5,430,000 in 2015,$5,340,000 in 2014) exemptions and portability of thegift and estate tax exemption, but also increased thetop gift, estate, and GST tax rate to 40%. You shouldunderstand how these new rules may affect yourestate plan.

Exemption portabilityUnder prior law, the gift and estate tax exemption waseffectively "use it or lose it." In order to fully utilizetheir respective exemptions, married couples oftenimplemented a bypass plan: they divided assetsbetween a marital trust and a credit shelter, orbypass, trust (this is often referred to as an A/B trustplan). Under the 2010 and 2012 Tax Acts, the estateof a deceased spouse can transfer to the survivingspouse any portion of the exemption it does not use(this portion is referred to as the deceased spousalunused exclusion amount, or DSUEA). The survivingspouse's exemption, then, is increased by theDSUEA, which the surviving spouse can use forlifetime gifts or transfers at death.

Example: At the time of Henry's death in 2011, hehad made $1 million in taxable gifts and had an estateof $2 million. The DSUEA available to his survivingspouse, Linda, is $2 million ($5 million - ($1 million +$2 million)). This $2 million can be added to Linda's

own exemption for a total of $7,430,000 ($5,430,000+ $2 million), assuming Linda dies in 2015.

The portability of the exemption coupled with anincrease in the exemption amount to $5,430,000 pertaxpayer allows a married couple to pass on up to$10,860,000 gift and estate tax free in 2015. Thoughthis seems to negate the usefulness of A/B trustplanning, there are still many reasons to considerusing A/B trusts.

• The assets of the surviving spouse, includingthose inherited from the deceased spouse, mayappreciate in value at a rate greater than the rateat which the exemption amount increases. Thismay cause assets in the surviving spouse's estateto exceed that spouse's available exemption. Onthe other hand, appreciation of assets placed in acredit shelter trust will avoid estate tax at the deathof the surviving spouse.

• The distribution of assets placed in the creditshelter trust can be controlled. Since the trust isirrevocable, your plan of distribution to particularbeneficiaries cannot be altered by your survivingspouse. Leaving your entire estate directly to yoursurviving spouse would leave the ultimatedistribution of those assets to his or her discretion.

• A credit shelter trust may also protect trust assetsfrom the claims of any creditors of your survivingspouse and the trust beneficiaries. You can alsoinclude a spendthrift provision to limit yoursurviving spouse's access to trust assets, thuspreserving their value for the trust beneficiaries.

A/B trust plans with formula clausesIf you currently have an A/B trust plan, it may nolonger carry out your intended wishes because of theincreased exemption amount. Many of these plansuse a formula clause that transfers to the creditshelter trust an amount equal to the most that canpass free from estate tax, with the remainder passingto the marital trust for the benefit of the spouse. Forexample, say a spouse died in 2003 with an estateworth $5,430,000 and an estate tax exemption of $1

Looking ahead

For 2013 and later years,the 2012 Tax Actpermanently extended the$5 million (as indexed forinflation) gift and estate taxexemption and GST taxexemption, and portabilityof the gift and estate taxexemption, but it alsoincreased the top gift,estate, and GST tax rate to40%.

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015

Securities offered through American Portfolios Financial Services, Inc. (APFS). Member FINRA/SIPC ( FINRA / SIPC ). American PortfoliosFinancial Services, Inc. and American Portfolios Advisors, Inc. are not affiliated with any other named business entities mentioned. Investmentadvisory services offered through PPS Advisors, Inc. a SEC Registered Investment Advisor, PPS Advisors, Inc. is not affiliated with APFS.

million. The full exemption amount, or $1 million,would have been transferred to the credit shelter trustand $4,430,000 would have passed to the maritaltrust. Under the same facts in 2015, since theexemption has increased, the entire $5,430,000estate will transfer to the credit shelter trust, to whichthe surviving spouse may have little or no access.Review your estate plan carefully with an estateplanning professional to be sure your intentions willbe carried out under the new laws.

Wealth transfer strategies throughgiftingBecause of the larger exemptions and lower tax rates,there may be unprecedented opportunities for gifting.

By making gifts up to the exemption amount, you cansignificantly reduce the value of your estate withoutincurring gift tax. In addition, any future appreciationon the gifted assets will escape taxation. Assets withthe most potential to increase in value, such as realestate (e.g., a vacation home), expensive art,furniture, jewelry, and closely held business interests,offer the best tax savings opportunity.

Gifting may be done in several different forms. Theseinclude direct gifts to individuals, gifts made in trust(e.g., grantor retained annuity trusts and qualifiedpersonal residence trusts), and intra-family loans.Currently, you can also employ techniques thatleverage the high exemptions to potentially provide aneven greater tax benefit (for example, creating afamily limited partnership may also provide valuationdiscounts for tax purposes).

For high-net-worth married couples, gifting to anirrevocable life insurance trust (ILIT) designed as adynasty trust can reduce estate size while providing asubstantial gift for multiple generations (depending onhow long a trust can last under the laws of yourparticular state). The value of the gift may beincreased (leveraged) by the purchase ofsecond-to-die life insurance within the trust. Further,the larger exemptions enable you to increase, gift taxfree, the premiums paid for life insurance policies thatare owned by the ILIT or other family members.Premium payments on such policies are taxable gifts,so these premium payments are often limited to avoidincurring gift tax. This in turn restricts the amount oflife insurance that can be purchased. But theincreased exemptions provide the opportunity to

make significantly greater gifts of premium payments,which can be used to buy a larger life insurancepolicy.

Before implementing a gifting plan, however, thereare a few issues you should consider.

• Can you afford to make the gift in the first place(you may need those assets and the related cashflow in the future)?

• Do you anticipate that your estate will be subject toestate taxes at your death?

• Is minimizing estate taxes more important to youthan retaining control over the asset?

• Do you have concerns about gifting large amountsto your heirs (i.e., is the recipient competent tomanage the asset)?

• Does the transfer tax savings outweigh thepotential capital gains tax the recipient may incur ifthe asset is later sold? The recipient of the gift getsa carryover basis (i.e., your tax basis) for incometax purposes. On the other hand, property left toan individual as a result of death will generallyreceive a step-up in cost basis to fair market valueat date of death, resulting in potentially lessincome tax to pay when such an asset is ultimatelysold.

Caution: The amount of gift tax exemption you usedin the past will reduce the $5,430,000 available to youin 2015. For example, a person who used $1 millionof his or her exemption in 2012, will be able to makeadditional gifts totaling $4,430,000 during 2015 freefrom gift tax.

Tip: In addition to this opportunity to transfer asignificant amount of wealth tax free, it's important toremember that you can still take advantage of the$14,000 per person per year annual gift tax exclusionfor 2014 and 2015. Also, gifts of tuition payments andpayment of medical expenses (if paid directly to theinstitutions) are still tax free and can be made at anytime.

Gifts

The large exemptions maymake it easier than ever tomake large gifts, but theymay also reduce the needto make large gifts in orderto reduce the gross estatefor estate tax purposes.

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