Tax and Estate Planning Update

The American Taxpayer Relief Act of 2012 (“ATRA”) brought stability to the estate and gift tax arena by providing for a maximum Federal estate tax rate of 40% with an inflation-adjusted $5 million exclusion. This Section provides an overview of the current laws and some estate planning opportunities available. It also addresses new legislation and potential future legislative changes.


In 2015, each individual can transfer up to $5,430,000 during life without incurring a gift tax. This amount increases each year, as indexed for inflation. Upon death, each individual has the same exemption amount available, less the amount used during his or her life.

The annual gift tax exclusion for 2015 remains at $14,000 per person per calendar year, or $28,000 for married couples, if gift-splitting is elected. Individuals may also make unlimited payments of tuition or medical expenses directly to the applicable institution.

The Generation Skipping Transfer (GST) tax applies to those transfers made from an individual to his or her grandchildren or more remote descendants, or to a trust for their benefit. The GST tax prevents a taxpayer from avoiding the transfer tax by bypassing the generation below (e.g. children). The rate of the GST tax is the highest applicable estate tax rate. The exemption amount applicable to each individual in 2015 is $5,430,000 and is also indexed for inflation.


Under the portability provision of the Internal Revenue Code, the surviving spouse can use the unused portion of the deceased spouse’s estate tax exemption for both gift and estate tax purposes, but not for GST tax purposes. Portability does not apply to state death tax exemptions. In order to preserve the unused estate tax exemption amount for the surviving spouse, an election must be made on a timely filed estate tax return for the deceased spouse.


The substantial gift tax exemption creates opportunities to make lifetime transfers to avoid estate taxes on post-transfer income and appreciation, and to transfer assets to grandchildren and future generations. Furthermore, the current low interest rate environment affords a number of effective techniques for transferring significant wealth to the next generation with minimal gift tax consequences. Some of the planning opportunities that work well in a low interest environment include:

  1. Loans to family members – An individual can make a low interest rate loan to another person (i.e., a child) who can invest the money and earn an amount greater than the interest he or she is required to pay on the loan.
  2. Grantor Retained Annuity Trusts (“GRAT”s) – These allow donors to transfer assets with high appreciation potential out of their estates, provided certain conditions are met. The donor can fund the GRAT with highly appreciating assets and must receive an annuity payment from the trust each year. If the assets in the trust appreciate in excess of the interest rate prescribed by the Internal Revenue Service, that excess amount gets passed onto others (i.e., children) at the end of the trust term.
  3. Intentionally Defective Grantor Trust - The sale of assets to an intentionally defective grantor trust allows the donor to transfer or sell appreciated assets to a trust in return for an installment note. The transaction enables the grantor to freeze the value of his or her estate at the value of the promissory note, without income and gift tax consequences. If the value of the assets in the trust appreciates over the interest rate prescribed by the IRS, the excess is transferred free of transfer tax to the remainder beneficiaries of the trust (i.e., children and grandchildren)


Estate basis reporting requirements - Congress recently enacted the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, which addresses the basis reporting requirements associated with estates. Specifically, the Act now requires an executor to provide consistent reporting of basis information between an estate and anyone inheriting the property from the decedent. Further, the Act created a new Internal Revenue Code Section 6035, which imposes a reporting requirement on the executor to furnish a statement to the IRS and to each beneficiary inheriting an interest in the decedent’s estate.

The statement must identify the value of each property reported on the estate return and any other information the IRS may require, which is not clearly defined by the IRS at this time. This reporting requirement is effective July 31, 2015 and requires the executor to provide the information within 30 days of the estate tax return’s due date or 30 days after the estate tax return is filed, whichever is earlier.

On August 21, 2015, the IRS issued Notice 2015-57, announcing that the due date for cost basis reporting has been extended to February 29, 2016. Treasury and the IRS are expected to issue additional guidance and forms to assist taxpayers with complying with this requirement.

  1. Estate Tax Closing Letters – The IRS has announced that, for estate tax returns filed on or after June 1, 2015, estate tax closing letters will only be issued upon the request of the executor. The IRS issues an estate tax closing letter when it concludes that an estate tax return, Form 706, is accepted as filed or, if adjustments are required (i.e., the return was examined on audit) the required adjustments were completed.
  2. Increase in New York Estate tax exemption - On April 1, 2015, the amount of property that can pass free of New York estate tax was increased to $3,125,000. This was part of New York legislation passed last year. In 2019, when the law is completely phased in, the exemption amount will be equal to the federal exemption (as indexed for inflation).
    The exemption amount is phased in as follows:

    For Decedents on or After... And Before... The Exclusion Amount will be
    April 1, 2014 April 1, 2015 $2,062,500
    April 1, 2015 April 1, 2016 $3,125,000
    April 1, 2016 April 1, 2017 $4,187,500
    April 1, 2017 Jauary 1, 2019 $5,250,000
    January 1, 2019   Scheduled to equal the
    federal estate tax exemption
    For estates that exceed the New York exclusion by more than 105%, the decedent’s estate will lose the benefit of the exclusion amount completely, and the entire taxable estate will be subject to New York estate tax.
  3. Changes in Connecticut Tax Laws - A $20 million cap is placed on the maximum amount of:
    1. Estate tax imposed on the estates of residents and nonresidents who die on or after January 1, 2016; and
    2. Gift tax imposed on taxable gifts made on or after January 1, 2015.
    Generally, the tax cap will affect taxable estates over $170.5 million. The estate and gift tax exemption remains at $2 million for Connecticut estate and gift tax purposes.


Valuation discounts are a significant component of estate planning. Discounts for lack of control and lack of marketability are often applied in valuing an interest in an entity that is controlled by family members.

In May, 2015, a representative from the Treasury commented on various proposed regulations and anticipated regulations and projects. In particular, she indicated that regulations may be imminent that might prevent minority interest and lack of marketability discounts for certain familyowned entities.


The gift and estate tax exemptions were made permanent under ATRA and will increase each year for inflation. However, given the low interest rate environment and the possibility that regulations may be issued that can reduce the effectiveness of estate planning, you should review your planning.