WHAT'S NEW IN FEDERAL AND CALIFORNIA ESTATE LAW
It’s that time of the year to recap the current state of the
law both federal and state, as it pertains to estate planning, probate, trusts,
and wills.
FEDERAL
On the
federal level, it’s short and sweet. The
Federal Estate Tax (FET) Exemption amount has increased slightly to $5,450,000. For married couples who take advantage of
portability[1],
this means that $10,900,000 can be passed on to their heirs estate tax free. Under current law, the FET exemption
fluctuates annually based on the rate of inflation. Thus, decedents who died in 2015 are entitled
to only $5,430,000 exemption but people passing in 2016 are entitled to
$5,450,000.
The
federal gift tax exclusion amount remains constant at $14,000. Because the gift
tax exclusion amount is tied in to inflation rates and is allowed to only
increase in thousand dollar increments, it does not change as often as the FET
exemption rate.
A new
law, the Federal Income Tax Consistent Basis Reporting requirement (IRC 1014(f)
and 6035, directs that the tax basis of property received from a decedent may
not exceed the value as of the property as reported on the federal estate tax
return. If no estate tax return was
filed, then the value cannot exceed the value as reported. In a nutshell, the IRS wants to make sure
that trust or estate beneficiaries are confined to the tax basis of the assets
that they receive as reflected on the decedent’s estate tax return. For
Trustees of estates that exceed the FET exemption, this means another form must
be filed with the IRS which identifies the values and the beneficiaries. The
form must be filed within 30 days of the due date of the Federal Estate Tax
Return.
CALIFORNIA
As for
California law, perhaps the biggest change is the passage of the California End
of Life Option Act which became effective January 1, 2016. As could be expected, the regulations are
rigorous with regard to the application of the law. The patient must have a terminal disease and
be medically expected to die within six months.
The patient must make both oral and written requests to their attending
physician in a timely fashion set by the statute. The patient must
self-administer the drug (no one else may assist). Immunity has been granted to
doctors who refuse to assist so one may wish to inquire of one’s own physician
or preferred hospital if this is something important to the patient. Note that
the law sunsets (expires) on January 1, 2026. Presumably the legislators want
to see how this law works out for ten years before they make it a permanent law.
Surprisingly,
another “temporary” law was passed with regard to the Revocable Transfer on
Death (TOD) Deed. As with the End of Life Act,
this law is complex and the rules are rigorous.
The idea is that a property (there are specifics on the type of property)
can be passed to heirs via the execution and recordation of a particular type
of deed. It took the legislature over ten years to pass the law because of the
many legal issues that this type of transfer raises (transferor capacity, Medi-Cal
reimbursement, creditor rights, title
insurance, to name only a few). The law
automatically sunsets on January 1, 2021. Because there are other ways of
accomplishing the transferor’s goals without the many restrictions and unknown
issues, many lawyers will shy away from this device. It is assumed within the legal community that
the use of the deeds will create a lot of future litigation work, however.
THE FUTURE
On the
federal level, it’s fairly safe to assume that nothing earthshaking will take
effect in 2016. The presidential election
being held late in the year will have no effect on existing law. That said, the candidates are miles apart in
their philosophies regarding the estate tax, but those philosophies follow
fairly traditional party lines. The
Republicans would eliminate the estate tax altogether and both Ms. Clinton and
Mr. Sanders would revert to a FET exemption of $3.5 million with an increase in
the tax rate from the current 40% to 45% for Ms. Clinton. Mr. Sanders raises
that rate to 55% for estates worth more than $50 million and a whopping 65% for
billionaire estates. He would also
reduce the annual gift tax exclusion back to $10,000 per person per year.
Keep in mind that the estate tax laws are
supposed to emanate from the House Ways and Means Committee and the oval office
is theoretically not the originating source of tax law. Of course the sitting administration can, and
often does, put pressure on the Congress to create the law as it wishes it to
be and there is always veto power. The Obama
administration has been highly active during his tenure in establishing both
the current exemption along with the availability of portability.
[1]
Portability allows a surviving spouse to file a claim with the IRS to allow
them to “carry” their deceased spouse’s FET Exemption with them. The claim is
made by filing an estate tax return (even if no tax is due) within nine months
of the date of death. The result is that when survivor dies, he or she will
have their personal Exemption, but also the exemption of their deceased spouse.
