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Last Will and Testament papers with glasses sitting on top

Looking Back – And Forward: New Tax Planning Paradigms

June 28, 2016

By William Schmidt, Senior Trust Officer

It is estimated that roughly 80% of Americans have made no provision to transfer their accumulated wealth at death. Most of the remaining 20% have stored their wills, trusts, powers of attorney, and other estate planning documents in a safe place and assumed this often unpleasant process is done and need never be revisited.

Unfortunately, life-changing events and the whimsical long arm of the Internal Revenue Service mean that these documents do require periodic updating, much as we may try to avoid it.

We have worked with a number of clients to update their outdated estates plans in the past several years and understand that tax strategies are a critical part of a well-designed plan. Below are a few estate planning opportunities you should be aware of:

FEDERAL ESTATE TAX CHANGES:  If your estate plan was created as far back as 1997 when the federal estate exemption was only $600,000, your plan might have focused on saving estate tax. Your objectives may look much different now in 2016 when the amount of the estate tax exemption, which is indexed for inflation, is $5,450,000. A married couple can now shelter a combined $10,900,000 from estate tax. Less than 1% of Americans are estimated to have assets greater than the exemption amount, so estate planning for taxation purposes now looks very different.

In the past, in order to take advantage of the exempt amount, a married couple needed to separate assets and have each spouse create a Family Trust for the survivor, which was available for the survivor’s needs but would not be included in his or her taxable estate at death. Due to a new concept referred to as “portability,” it is no longer necessary to create a Family Trust for the surviving spouse if the only reason is to save estate taxes. However, there may be other non-tax reasons to use a Family Trust as part of your estate plan, such as creditor protection for beneficiaries, solving inheritance issues for blended families, and independent asset management for disabled or incapacitated beneficiaries.

With portability, anything passing to a surviving spouse will be tax-exempt under the marital deduction exemption, and the unused estate tax exemption transfers to the surviving spouse who can use both exemptions to protect assets at his or her death. Because of these new rules, you should discuss the possibility of simplifying your estate plan with your advisor.

FEDERAL GIFT TAXES:  Gifts made to anyone other than a spouse or charity have always been subject to annual limits, and you must file a federal gift tax return for any gift exceeding the annual exemption, which results in a reduction in your federal estate tax exemption. Currently, gifts of less than $14,000/year for individuals do not require reporting ($28,000/year for married couples). In addition, gifts for education and medical needs in any amount are not reported. This exemption is also indexed for inflation. Be sure to discuss how you would like to support family members, charities, or loved ones with your advisor so they can help you maximize your tax benefits.

RETIREMENT PLAN TAXATION:  Taxpayers are familiar with the benefits of accumulating wealth in IRAs or other retirement plans, but it’s not until retirement or the age when taxpayers are  required to take minimum distributions that they consider an exit strategy. At that time, all of the deferred investment tax advantages are eventually distributed at ordinary income tax rates. Failure to take required distributions will result in penalties.

It is important to speak with a financial advisor to plan for the most beneficial exit strategy not only for the account holder, but also for their designated beneficiaries. Further, for those who intend to make charitable gifts during life or at death, consider this exit strategy: one of the best assets for charitable gifting is usually the IRA or other qualified retirement accounts.

INCOME TAX RATES:  Things seldom seem to get better when it comes to sharing our income with Uncle Sam. Currently, the top federal income tax rate for individuals is 39.6%. Add this to Colorado’s top rate of 4.63% and the potential for an additional net investment income rate of 3.8%, and you might be contributing 48.03% of your hard earned dollars to the government.

Capital gains tax rates have also increased: 20% federal, 4.63% state, and 3.8% net investment income, resulting in a loss of 28.43% of long-term capital gains. The loss resulting from high capital gains taxation upon the sale of a highly appreciated asset might be eliminated or partially avoided by several charitable strategies or by selling these assets in states such as Wyoming where there is no state income tax. Our offices in Laramie and Jackson Hole can provide information and assistance in this process.

YOUR BUCKET LIST:  As you evaluate past choices in your estate plan and consider future decisions, remember that there are basically three buckets in which your unused wealth will eventually be deposited – your family, charity, and the IRS. You may be surprised at the outcome if you have not recently reviewed the choices you made years ago when things looked much different than they do today.

There is never a better time to begin, and, in the words of Walt Disney, “The way to get started is to quit talking and start doing.”




Investment and insurance products and services are not a deposit, are not FDIC insured, are not insured by any federal government agency, are not guaranteed by the bank and may go down in value.

First Western Trust cannot provide tax advice. Please consult your tax advisor for guidance on how the information contained within may apply to your specific situation.

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