Estate Planning in Reverse: New Methods for Tax Savings

By: Steven A. Widdes

Publication Name:

Bethesda Beat

Media Type: Publication

One major consideration among clients during the estate planning process is minimizing negative tax consequences for themselves and future generations. Traditionally, the tax planning component involved making sure that the assets were either reduced or excluded from the decedent’s “Taxable Estate” at the time of his or her death. Yet recent changes in the tax laws have made this process trickier and, in many situations, “reverse estate planning” has become the solution.

Federal Estate Tax Exemption Changes

The primary change that has spurred this “reverse estate planning” trend is the dramatic increase in the Federal Estate Tax Exemption over the last few years. In 2016, the maximum protected amount for Federal Estate and Gift Taxes before out-of-pocket taxes must be paid has grown to $5.45 million and, for a married couple, that can essentially mean nearly $11 million is sheltered from Federal Estate Tax. The impact of this Federal Estate Tax Exemption increase, in combination with the effects of higher capital gain and the new Medicare tax on the sale of the differential between the sales price of capital gains assets and their income tax basis, has introduced alternative planning methods for many clients.  

Keeping Assets in the Taxable Estate to Minimize Taxes on Capital Gains

While by no means true in every taxable estate, sometimes it may be more tax efficient for the family to have the older generation member hold on to the asset until death in lieu of gifting the interest or otherwise transferring the asset before death. This is where “reverse estate planning” comes in. 

For most property interests, other than assets that have not been taxed previously (e.g., IRAs), the income tax basis is generally “stepped up” to the date of death value. This means that if an asset’s value increases between the time of purchase and the time of the owner’s death, when that asset is eventually sold (following its transfer from the decedent’s estate) it may avoid some if not all of the capital gains and the recently imposed 3.8% Medicare tax on such gains.

To the extent that the assets in their estates can be sheltered from estate taxes, due to the larger exemption available, while benefiting from a step-up in basis because the assets were held in the decedent’s taxable estate at the time of death, clients may achieve an overall tax benefit that is counter-intuitive to traditional planning. 

The idea of holding on to certain assets that are highly appreciated assets in lieu of transferring them prior to death is therefore becoming an increasingly valuable estate tax planning tool. There are numerous variables at play and every client has unique circumstances, but this “reverse estate planning” alternative is one that works for many people and warrants further discussion with an experienced estate planning attorney.  

If you have questions about recent changes in the tax laws impacting estate planning, contact a member of Stein Sperling’s estate planning department at 301-340-2020.

Steve Widdes is a principal of Stein Sperling Bennett De Jong Driscoll PC and co-chair of the Estates and Trusts practice group. He works with clients in the areas of estate planning, estate and trust administration and tax and business succession planning.  He also assists them in protecting assets for future generations through long-term trusts for children, as well as pre- and post-nuptial agreements.  

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