Consider Your Estate Plan In Light Of Recent Tax Changes

By: Burt Levitch

Date: December 1993

Each Congressional session has its share of legislative proposals affecting trusts and estates.  And what would those proposals be without the usual speculation about their impact and the likelihood of their passage?  The first session of the 103rd Congress has been no exception.

Most of the proposed changes which caused concern for many of you were not enacted when the President signed the Revenue Reconciliation Act of 1993.  More fundamental changes, with even greater impact on existing estate plans, may come at some point in the future.

There are, however, several important changes contained in the new law for you to consider.  And as you think about these modifications, the importance of keeping your estate plan current in light of changing assets and family circumstances will be reinforced.

I.     Maximum Estate and Gift Tax Rate Maintained at 55 Percent

The new law reinstates the maximum federal estate and gift tax rate of 55 percent for estates and gifts in excess of $3,000,000.

Prior to 1981, federal estate and gift tax rates ranged up to 77 percent.  Previous legislation has been phasing in a lower maximum rate and would have reduced the top rate to 50 percent beginning January 1, 1993, but the new law retains the 55 percent maximum rate in effect since 1984.  The change is retroactive to the beginning of this year, so all 1993 transfers remain subject to the 55 percent top rate.

The following chart presents the range of federal estate and gift tax rates.  It will remind you of the very high cost of transferring wealth, and it may prompt you to consider carefully the tax burden which could be imposed on your own estate.

II.    Estate and Gift Taxation

The news is even worse for larger estates.  And don’t forget that transfers to grandchildren also are subject to the generation-skipping transfer tax, at a flat rate of 55 percent, although with proper planning each grand-parent may transfer a total of $1,000,000 to his or her grandchildren without incurring this additional tax.

III.  Income Taxes on Trusts Increase

As you have no doubt heard, the new law imposes higher individual income tax rates.  A new 36 percent marginal rate applies to joint filers with taxable income over $140,000, and to single taxpayers with taxable income over $115,000.  A new 39.6 percent marginal rate applies to individuals with taxable income over $250,000.

You may not have heard, however, that the new, higher rates are also imposed on income-accumulating trusts (and on income earned by estates during administration).  The existing income tax rates for trusts and estates now apply to lower levels of income as well.  Both of these changes are effective January 1, 1993.  The result?  Review the chart on the next page to see that accumulating income has become a very expensive proposition.

Keep in mind that unearned income of children under age 14 is generally taxed at their parents’ top marginal income tax rate.  While this “kiddie” tax already discourages the shifting of income from parents to their children, the increase in trust income tax rates and the compression of these tax brackets pose new problems.

If your present estate plan employs a trust that would retain income from year to year, or if you use such a trust currently, it is imperative that you review the economics of the trust to determine if it still makes sense in your particular situation.

IV.   Income Taxation of Trusts and Estates

Charitable Gifts of Appreciated Property May Be Deductible at Their Fair Market Value

The strong incentive for retaining appreciated property until death (when its basis may step up to fair market value) has been diminished somewhat, especially if an individual wants to donate it to a charitable organization during his or her lifetime.

In recent years, charitable contributions of appreciated property could often trigger the imposition of the alternative minimum tax.  As a result, taxpayers were effectively taxed on the increase in value of the appreciated property — even though the property was being transferred to a charitable recipient.  Gifts of art work to museums plummeted, for example, during periods when this rule was in effect.

The new law repeals the alternative minimum tax on charitable contributions of appreciated real and personal property (including tangible personal property used in connection with the donee’s exempt purpose).  Such gifts may now be made during the donor’s lifetime with substantial income tax savings, along with the advantage of removing the item from the donor’s taxable estate.

V.     What Else To Think About?

The foregoing information illustrates the importance of evaluating the estate and income tax ramifications of your current estate plan.  Married couples, whose estate plans use the marital deduction to reduce or eliminate the estate tax on the death of the first spouse, must still face the possibility of having estate taxes consume more than half of their assets on the survivor’s death.  Single individuals also face substantial diminution of their wealth as it is transferred to family and friends.

If you have questions regarding this newsletter or your estate plan, please call our Trusts and Estates Department at (310) 858-7700.

With over a decade of tax-related legal experience, Burt Levitch, head of our department, devotes his practice to estate planning and estate and trust administration.  In addressing these issues, he helps clients consider the financial and emotional needs of family and friends while facing the constraints imposed by estate taxation and other applicable laws.

Our Trusts and Estates Department offers a wide range of estate planning and probate services geared to provide an orderly transfer of wealth from one generation to another.  We prepare wills and trusts, deal with real property issues, and furnish sophisticated lifetime and postmortem tax planning.  We also provide counsel to executors and trustees on the administration of estates and trusts, and we provide skilled representation in probate, trust and conservatorship proceedings and disputes.

Rosenfeld, Meyer & Susman was founded in 1957.  The firm's area of expertise include: Trusts and Estates, Litigation, Taxation, Corporate and Securities, Entertainment, Family Law, Labor and Employment Law, Insurance Coverage and Defense, Real Estate, and Employee Benefits.  

  Return to top