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Implications of the American Taxpayer Relief Act

September 15, 2014

Members have businesses, other assets, life insurance, own real estate and other property, all of which when added together totals substantial value.  Thus, estate planning to lessen estate tax impact on death becomes particularly pertinent, especially to ensure maximum value is passed to heirs.  I have written about this subject before but new Federal legislation requires members to reconsider their estate planning.  The new Federal legislation known as the American Taxpayer Relief Act ("ATRA") has been discussed in the media, by news commentators, and particularly in newspaper and magazine articles.  ATRA was enacted in 2012.

As indicated, the changes made may affect existing plans and benefits requiring review and reconsideration.

The estate tax, when originally enacted, was intended to provide a source of raising revenue and to prevent a small number of individuals from accumulating substantial wealth.  The Census Bureau has provided interesting information dealing with average household wealth, not generally sufficient in value resulting in a requirement to file and/or pay an estate tax.  But a few examples are of interest.  In the Northeast, the median household net worth increased from $114,684 in 2000 to $122,239 in 2005 and then decreased to $91,025 by 2011.  In other regions of the country, median household net worth is less.  In the Midwest, median net worth was $81,049 by 2011 and in the South, median net worth decreased to $60,700 in 2011.  The West experienced the largest changes during the last decade decreasing to $59,431 in 2011.  Anticipated after the passage of ATRA only 3,000 to 4,000 estate tax returns will be filed reflecting an estate tax owed, although many additional estate tax returns are likely to be filed without estate tax liability.  The estate tax threshold when tax liability becomes relevant is now $5.25 million dollars to be indexed by inflation and the tax rate is now 40%.

There are other considerations arising from ATRA touching on potential estate taxes that bear mentioning:

Income tax planning to lessen estate taxes is important.  If assets increase in value, obviously the potential to reach the estate tax threshold and estate tax liability increases.  Hence, there could be an emphasis on the disposition of assets by gifting, particularly to family members so such assets won't be included in an individual's estate, nor in current income derived from such assets.  With such gifting of assets to younger heirs, devices are needed to avoid such assets becoming subject to their creditors nor subject to distribution considerations to the spouse of an heir in the event of divorce.  Family business succession issues should include both income and estate tax considerations.  Where possible, to maintain family harmony and avoid potential conflict, distribution issues should be discussed openly at family meetings during lifetime, so especially on death, there will be no or less surprise with dispositions.

Life insurance is often used to surplant distributions needed to pay estate taxes and/or estate liabilities.  If a business has family members, a family limited partnership can create a mechanism to lessen value and estate tax liability.

These are some issues that existed prior to the passage of ATRA but have become more significant post-ATRA.  Again, suggested is members consult with their accountants and/or tax advisors and/or attorneys to review their estate planning or, if no such planning has yet been undertaken, to recognize the need and address it.

This article was written by Norman P. Zarwin, Esquire and published in the Alliance of Automotive Service Providers of Pennsylvania and Delaware magazine. 

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