Estate planning: Protection of assets and other trends for 2014

While tax laws continue to affect estate plans, protection of assets has become an increasing priority as baby boomers age.

“There’s been a lot more conversation in the last five years about asset protection, not just about the client’s assets, but also about protecting the assets the children will eventually inherit,” says James P. Cashman, a partner at Berliner Cohen.

Smart Business spoke with Cashman about trends in estate planning and what has occurred in response to the American Taxpayer Relief Act of 2012, which changed estate, income and gift tax laws.

What has changed with estate and gift taxes?

Large estates — the applicable credit for each individual is now $5.34 million per person — i.e., the amount that can be passed to family members (or anyone else for that matter) without any estate or gift tax. In the last several years the credit has grown from $1million to what it is today. Married couples can now shelter up to $10.68 million from estate taxes.

Because of that change, we expected married couples with estates of under $10 million to want to simplify their existing plans by leaving everything to the surviving spouse and then to the children; however, such has not been the case. Married couples with estates under $10 million are still opting for dividing the estate into two parts upon the death of a spouse. In so doing, each spouse wants to make sure that if they die first, their share of the estate ends up with the children rather than the surviving spouse’s new spouse or someone else.

How has the end of the Bush-era tax cuts affected estate plans?

Especially in California, which now has a state income tax rate of 13.3 percent on top earners, more estate planning decisions are being made based on income tax and capital gains tax issues than ever before.

Not only do people want to know about estate transfer taxes when they die, they also want to limit or avoid income or capital gains taxes while they’re alive. Therefore, the conversation of shifting income to family members in a lower bracket and charitable gifting techniques has increased tremendously.

That includes increased interest in charitable remainder trusts or gift annuities, where a person can donate a highly appreciated asset in return for a guaranteed income stream for a term of years or their lifetime and avoid having to pay capital gains tax.

More people also are inquiring about moving to jurisdictions without state income taxes, like Florida, Texas and Nevada. They have businesses in California and want to know how to detach from the state, as rules regarding how California recognizes residents are becoming stricter.

For example, one client with substantial real estate holdings all over the country wanted to move to Florida; he’s a better candidate than someone with real estate only in California. But my advice was that if he wanted to be a Florida resident, he must give up all (or most all) of his contacts in California, including, but not limited to, his California business office, his California license and his California voting registration.

But not all estate planning trends are about taxes. Protection of assets for children and grandchildren has been a growing concern.

Why has protection of assets become more important?

Baby boomers like to be very clear about what they want. They worry about where assets would go if a child got divorced or owed creditors. Perhaps people have become more aware of our litigious society, and they now are talking to professionals to review all options.

Baby boomers are also concerned about who inherits their personal effects. Traditionally, personal property distribution was covered in wills. Now, in many instances, this is covered by a letter of instruction form that the client can update easily.

This trend also extends into other areas, such as health care directives. Clients are getting more clear about what they want — feeding, hydration, CPR — and want to be able to make these choices clearly in their health care directive or the POLST.

James P. Cashman is a partner at Berliner Cohen. Reach him at (408) 286-5800 or [email protected].

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