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Tax Deal a Game Changer for Estate Planning
Monday, January 7, 2013

Charitable contributions might be used to offset some gain, but the phase-outs for itemized deductions might negate some charitable planning.

Charitable remainder trusts, through which the client can gift appreciated assets to be sold and defer capital gains tax, are another option. These “CRT” trusts are not subject to the new Medicare tax on passive income, another advantage.


Life insurance products have long offered a tax-favored envelope to protect investment dollars. But the new tax increases substantially enhance the benefit of  investment build-up inside the protective skin of an insurance policy.

There are several new twists to life insurance planning in light of the new estate tax laws.

Clients with wealth under the estate tax threshold -- potentially $10.24 million for a couple for 2012, and inflation indexed in future years -- might skip the complexity and cost of a life insurance trust and merely own their policies directly. It’s far from optimal from the perspective of protecting the assets. But the estate tax rationale for insurance trusts will not apply to most clients, in light of the high inflation-adjusted exemption and the availability of spousal portability.

A planning technique that has been used over the years, but which most estate planners frowned upon, was purchasing life insurance inside a retirement plan -- so that pre-tax dollars could be used to fund premiums. Estate planners were generally worried about the inclusion of the insurance proceeds in the insured’s estate. That now changes for clients under the large exemption amounts.


It had been common for planners to work with clients’ estate planners to divide assets into separate accounts and names, so that both spouses would have sufficient assets to fund a bypass trust. This almost ubiquitous planning step has changed in many significant ways.

  • Many wealthy clients gave most or all of their $5.12 million exemption to trusts in 2012. If only one spouse made such gifts, rather than dividing assets roughly 50/50, the spouse who did not use up his or her exemption might consider holding all assets in his or her name to fund the bypass trust. (More on that in a minute.) If both spouses used up their exemptions in 2012, it really won’t matter much.
  • For the vast majority of clients, unless state estate tax planning requires asset division, title to assets may be irrelevant from a tax planning perspective. They simply won’t be subject to an estate tax under the new rules.
  • With the growing threat of identity theft, regardless of the lack of estate-tax consequences, it might still be beneficial to divide some assets, assigning them to several names and tax identification numbers. This would minimize exposure if one tax identification number is stolen.


These trusts are designed to protect a surviving spouse, by providing access to trust assets but keeping those assets outside the surviving spouse’s estate. They were the mainstay of many client plans, but the “new normal” of estate planning changes this.

For one thing, most clients will simply be far enough beneath the inflation-adjusted exemption amount that they will want to avoid the complexity of bypass trusts -- which involves titling assets, dealing with a trustee, filing trust income tax returns and so forth.  Moreover, clients who gifted most or all of their exemption amounts in 2012 may have little need for a bypass trust. Setting up a trust for modest assets may simply not be cost-effective.

Estate planners will, quite appropriately, endeavor to convince clients that trusts are needed to address state estate tax, divorce/remarriage risk and more. And most wills and revocable living trusts mandate the funding of these trusts. But many clients will simply no longer tolerate the complexity.

For many of your high-net-worth clients, it’s going to be essential to revise existing estate planning documents. The new tax deal changes the paradigm of estate planning. Planners will face new challenges in coordinating with their clients’ estate planners, to assure that planning is done properly and in a manner that best meets client goals.

Martin M. Shenkman,CPA, PFS, J.D., is a Financial Planning contributing writer and estate planner in Paramus, N.J. He runs laweasy.com, a free legal website.

(3) Comments
Good article. A minor correction is the name of the act, which is the American Taxpayer Relief Act of 2012. I would enjoy a follow-up article on the act's effect on widows and widowers. That is, what happens to a widow with $5m to $8m, and whose deceased spouse has an old trust funded with a $1.5m exemption at death, plus the taxable growth since then?
Posted by David W | Monday, January 07 2013 at 2:36PM ET
Marty, Great article, as always! Two comments on asset titling is "step up in basis" and hedging bets on low cost basis assets. The last "freebie" is the step up to FMV at first death to allow surviving spouse to sell assets with zero capital gains tax....EVEN if they do not pay a penny of estate tax. My second comment is the focus on the tax free build up inside a life insurance policy. Maybe there are actually two freebies left.....
Posted by Susan B | Monday, January 07 2013 at 3:03PM ET
I must agree with you: the article is really awesome, so many useful and interesting stuff in it. To bad that the process might be too complicated. I like all of your articles! My parents (I have showed them this site) and I are your biggest fans. You do a great work to help to deal better with personal finances. A lot of your advices helped prevent me from one hour payday loans and other ways of borrowing cash. Thanx a lot for your job!
Posted by David G | Thursday, January 17 2013 at 5:49AM ET
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