2015 Private Clients Group Annual Client Update
OCTOBER 2015 CLIENT UPDATE
Dear Clients and Friends:
Since the enactment of the American Taxpayer Relief Act of 2012, we have gained relative certainty in the federal estate, gift and generation-skipping transfer tax system. However, there have been more recent changes in federal tax law, and we expect the possibility of further developments that may affect some of the estate and trust techniques our clients may be considering.
In addition, 2015 saw a number of state-level changes in both transfer tax law and trusts and estates law. This letter will summarize some of the key federal and state changes most likely to be of interest to our clients. Should you have any questions or desire a more detailed explanation of the legal or tax-related subjects addressed in this letter, please consult with your Cummings & Lockwood attorney.
Federal Tax Law and Filing Deadline Changes
On August 1, 2015, federal tax law changes were enacted as part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the "Transportation Act"). Most notably, the law now requires that assets included on a federal estate tax return, and therefore receiving a "step up" in basis for capital gains tax purposes, must be consistently reported with the same new basis by the recipients of the property. To regulate this new "consistency in basis reporting" requirement, executors and personal representatives of estates must now provide basis information to the recipients and to the IRS or face penalties for the failure to do so. This requirement applies to all estates which are required to file a federal estate tax return on or after August 1, 2015. If you are currently serving as an executor or personal representative of an estate, you may wish to consult with your Cummings & Lockwood attorney regarding these new reporting requirements.
The Transportation Act also changed the filing deadlines for a number of federal tax returns, including Foreign Bank Account Reporting ("FBAR") returns, partnership, limited liability company and S-Corporation Returns, and C-Corporation Returns. The new filing deadlines are effective as of January 1, 2016. Accordingly, you may wish to consult with your tax preparer or Cummings & Lockwood attorney regarding the new deadlines for any and all of your tax returns in the coming year.
Potential Restrictions on Fractional Interest Discounts for Transfers to Family Members
In prior years we have included in our updates several potential changes to the federal estate and gift tax laws. One that we have mentioned, restrictions on fractional interest discounts for certain asset transfers to family members and/or trusts for their benefit, now appears to be coming to fruition. Regulations from the federal government on this topic are expected before the end of the year. Accordingly, if you have been considering transfers of minority interests in entities or assets to family members which you would like valued with a fractional interest discount and have not already spoken with your Cummings & Lockwood attorney about this, you should do so immediately.
Connecticut Probate Court Fee Changes
On June 30, 2015, Governor Malloy signed the Connecticut State Budget for the Biennium ending June 30, 2017 (The "CT Budget Act") which included changes to the Connecticut estate and income tax systems as well as a change in the probate court fees for the settlement of estates.
All estates of Connecticut decedents must pay a fee to the probate court which is calculated based on the value of the Connecticut taxable estate. Until June 30th of this year, the fee was capped at a maximum of $12,500. Effective July 1st, the cap on this fee has been removed and the rates used to calculate this fee were increased to a maximum of 0.5% of the Connecticut taxable estate. Although the fees for estates of $2,000,000 or less remain the same, estates in excess of $2,000,000 will now face higher fees. This means that many estates which previously would have paid a $12,500 fee to the probate court will now be faced with much larger fees. For example, a $20,000,000 estate will now owe a probate court fee of just under $100,000.
Historically, the probate court fee has been more of a tax than a fee as it has been charged on the Connecticut taxable estate, whether the assets of the estate fell within the jurisdiction of the probate court or not. Although some have questioned whether a "fee" that is not tied to your use of the court is fair, while the cap remained in place, it was not economical to challenge the fee. Now that the fee cap has been removed, it may very well be possible that a challenge of the fee or future legislation will limit the application of the fee to probate property. If that were the case, clients who have successfully transferred most or all of their assets to their Revocable Trusts prior to death may be able to avoid or at least reduce the probate court fees. To be clear, as of right now there is nothing a Connecticut resident can do to avoid or reduce the probate court fees due at death other than giving away assets prior to death (with possible federal and Connecticut gift tax implications) or moving out of Connecticut. However, there is no downside to planning for the possibility of a change in the fee structure by moving most or all of one’s assets to a Revocable Trust before death.
A Cap on the Connecticut Estate and Gift Tax
While estates of more than $2,000,000 are now facing higher probate court fees, as discussed above, very large estates are in a better position in Connecticut than before. The same CT Budget Act which increased probate court fees also placed a cap of $20,000,000 on the amount that can be due from any person or their estate as a result of transfers during life or at death. Essentially, this means that estates of $170,500,000 or more will all now pay a flat estate tax of $20,000,000.
Connecticut Income Tax Rates
The same CT Budget Act which increased probate court fees and capped estate taxes also retroactively increased the income tax rates for individuals earning $250,000 or more ($500,000 for married couples filing jointly) to 6.9% and further increased the income tax rates for individuals earning $500,000 or more ($1,000,000 for married couples filing jointly) to 6.99%. The Connecticut income tax rate on trusts and estates was also increased to 6.99%. These income tax rates are effective beginning January 1, 2015.
New Connecticut Power of Attorney Law
On July 7, 2015, the Connecticut legislature enacted a new Uniform Power of Attorney Act. Although the provisions of the Act are not effective until July 1, 2016, the new law will affect Powers of Attorney signed both before and after that date. The new statute expands the scope of powers that can be granted under a power of attorney, provides greater oversight of agents acting under the authority of a power of attorney and provides more
flexibility in designing powers of attorney and determining how and when they may be used. In addition, the new law regulates the acceptance of powers of attorney by banks and other institutions to be sure they are not arbitrarily rejected. While powers of attorney signed before July 1, 2016 will remain effective, if you would like to learn more about the new Power of Attorney Act or would like to review and update your power of attorney documents, please contact your Cummings & Lockwood attorney.
Florida Changes UTMA Law
Florida’s Uniform Transfers to Minors Act ("UTMA") was amended this year. Under most circumstances, UTMA accounts can now be created which direct that gifts for a minor be retained in the custodial account until the minor reaches age 25 (rather than age 21). However, to ensure that any lifetime gift you make to an age 25 custodial account qualifies for the gift tax annual exclusion, the beneficiary must be given an opportunity to withdraw the custodial property for a period of at least 30 days after reaching 21 or after receiving mandatory notice of the withdrawal right, whichever is later. Any custodial property that is not withdrawn during the provided time period can remain in the custodial account until the beneficiary reaches 25. If you wish, you can create an age 25 custodial account by a direction in your will or trust, but only if the beneficiary is under age 21 at the time of your death. If you would like more information about Florida UTMA accounts, call your Cummings & Lockwood attorney.
Florida Changes Health Care Advance Directive Law
Florida’s Health Care Advance Directive laws were updated this year to include another option when designating a person to assist you with health care decisions. Effective October 1, 2015, you can now designate a health care surrogate to act together with you while you have capacity as well as to act on your behalf in the event you become incapacitated. Sometimes referred to as a "durable" health care surrogate, your surrogate can assist you with the sometimes complex task of understanding health care treatments and with making health care decisions, but your wishes will control so long as you have decision-making capacity. In addition, a new statute was enacted that formally permits parents and guardians to appoint health care surrogates for minor children. If you would like more information about Florida Health Care Advance Directives, call your Cummings & Lockwood attorney.
Review and Current Status of New York Estate Tax Laws
In 2014, New York made significant changes to the New York estate tax laws. As a result, New York continues to have no state gift tax and New York’s estate tax exemption continues to rise. New York’s maximum estate tax rate remains at 16%. The estate tax is now essentially a cliff tax, however, such that the exemption is phased out for taxable estates that exceed the exemption amount, and taxable estates that are more than 105% of the exemption amount will be taxed in full as if no exemption existed. This means that any estate in excess of the exemption amount available for that estate by more than 5% will face a tax on the entire estate and not just the amount that exceeds the exemption. The New York estate tax exemption amount is currently $3,125,000 and is scheduled to increase to $4,187,500 on April 1, 2016.
We remain mindful that future negotiations on budgets and other fiscal initiatives always leave open the possibility of further changes in federal tax rates and/or exemption amounts or the further curtailment of various popular gifting techniques. We also remain cognizant that changes in state laws, taxes and fees can have as much or more effect on our clients, their estate plans and their families than federal tax laws and policies. We will, as always, endeavor to keep you informed of any major developments in future updates.
Copyright 2015, Cummings & Lockwood LLC. All rights reserved.
In this Update, we have deliberately simplified technical aspects of the law in the interest of clear communication. Under no circumstances should you or your advisors rely solely on the contents of this Update for legal advice, nor should you reach any decisions with respect to your personal tax or estate planning without further discussion and consultation with your advisors.
In accordance with IRS Circular 230, we are required to disclose that: (i) this Update is not intended or written by us to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer; (ii) this Update was written to support the promotion or marketing of the transaction(s) or matter(s) addressed by such materials; and (iii) each taxpayer should seek advice on his or her particular circumstances from an independent tax advisor.