Let’s be honest: There aren’t a lot of changes to the estate planning laws or the tax regulations coming in 2016. But some evolving and subtle changes to these laws are likely to impact your clients. Wise estate planners will get out in front of these and alert their clients to what they can expect.  

Here are some of the moves that your clients should be aware of in 2016.

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1. Most recently, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (PATH) into law on December 18.

PATH extends certain IRS provisions that had expired at the end of 2014 and makes other changes to the tax code, most pertinently with respect to real estate investment trusts. 

The most significant changes limit the tax advantages for spin-off transactions involving a REIT. The new rules say that a REIT spin-off qualifies for tax-free treatment only if, immediately after the distribution, both the distributing and controlled parties to the transaction qualified as REITs. There are other restrictions on REIT transactions made on or after December 7, 2015, as well. If your clients are involved in REIT investing, it makes sense to familiarize yourself (and them) with these new regulations.  

(AP/Photo)

2. Another important change in the PATH legislation may affect many wealthier clients.

Taxpayers who are 70 ½ or older will now permanently be able to make tax-free charitable donations directly from their IRA accounts, and have them count as required minimum distributions.

The bill extends the provision retroactively to January 1, 2015. So if a client transferred money from an IRA to a charity anytime in 2015 — even before the law was signed —the transfer qualifies as a required minimum distribution. 

3. Basic tax exemptions get changed every year due to inflation, although these are modest for the New Year.

The estate tax exemption for 2016 will be $5.45 million, an increase of $20,000 over the 2015 exemption. The maximum federal estate tax rate remains at 40 percent. 

The exemptions for a couple of other key estate planning provisions are also raised to $5.45 million in 2016: the lifetime gift tax exemption and the exemption from generation-skipping transfer taxes.  

A client who makes transfers subject to the GSTT in 2016 will need to file a federal gift tax return on or before the income tax date of April 17, 2017. If the generation-skipping transfer does not amount to $5.45 million, no GSTT will be due, but the client’s exemption will be reduced by the amount of that transfer. 

Similarly, if the taxable gift does not exceed $5.45 million, then no gift tax will be due; instead, the lifetime gift tax exemption of the person who made the gift will be reduced by the amount of the taxable gift. 

4. In 2016, the annual gift tax exclusion will remain at $14,000, but there is one change to the rules.

The first $148,000 in gifts to a spouse who is not a U.S. citizen are not included in the total amount of taxable gifts. This is an increase of $1,000 above the 2015 exclusion. 

The tax rates for estates and trusts are unchanged from last year, but the tax brackets for them have changed for 2016: 

  • 15 percent bracket: For taxable income of not more than $2,550. 

  • 25 percent bracket: For taxable income of more than $2,550, but not more than $5,950. 

  • 28 percent bracket: For taxable income of more than $5,950, but not more than $9,050. 

  • 33 percent bracket: For taxable income of more than $9,050, but not more than $12,400. 

  • 39.6 percent bracket: For taxable income of more than $12,400. 

Since an estate or trust will hit the top rate of 39.6 percent at just $12,400 of taxable income, it’s worth warning anyone expecting such income of that limit, and doing whatever is possible to manage that tax bite. 

The portability rules, allowing a surviving spouse to use a deceased spouse’s unused exclusion amount, will continue unchanged into 2016. In effect, a couple can transfer over $10 million to heirs without triggering estate tax under the portability rule.

More features by Tom Nawrocki:

Reverse mortgages in an estate plan: 7 pros and cons

The charitable gift annuity: 10 talking points for donors

529 plans vs. life insurance: 7 questions to ask clients

When foreign wills become a problem

 

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