2016 Estate Planning Update

This client alert provides a brief overview of the 2016 gift, estate and generation-skipping transfer (“GST”) tax exemptions and gift tax exclusions, the current interest rates applicable to certain estate planning techniques and a development relating to charitable gifts from individual retirement accounts. Clients may also be interested in reviewing our memorandum entitled Overview of Lifetime Gift and GST Tax Planning, which provides a broad overview of lifetime estate planning techniques under current law.

Annual Inflation Adjustments

The annual exclusion from the gift tax and the Federal gift, estate and GST tax exemptions are indexed annually for inflation.

Annual exclusion gifts. For 2016, the annual exclusion amount remains at $14,000 per donee (or $28,000 per donee for married couples who elect to split gifts). For gifts to a non-citizen spouse, the annual exclusion for 2016 is $148,000 (increased from $147,000 in 2015). As always, we recommend that annual exclusion gifts be made as early as possible in the calendar year.

By way of reminder, payments of certain qualified education and medical expenses, including tuition payments and health insurance premiums, also qualify as tax-free gifts if made directly to the provider.

Federal gift, estate and GST tax exemptions. For 2016, the Federal gift, estate and GST tax exemptions are each $5.45 million (increased from $5.43 million in 2015). For married couples who elect to split gifts, the Federal gift and GST tax exemptions are each $10.9 million.

Clients who have previously used part or all of their gift and GST tax exemptions may wish to take advantage of the inflation adjustment by making additional gifts this year. In addition, married couples may wish to review how their assets are titled with a view toward having sufficient assets titled in each spouse’s name to make use of the full Federal estate and GST tax exemptions on the death of the first spouse to die.

State Estate Tax Exemption

The New York estate tax exemption will increase from $3,125,000 to $4,187,500 on April 1, 2016. The exemption is scheduled to increase on April 1, 2017 to $5,250,000 and will increase on January 1, 2019 to match the Federal estate tax exemption.

The estate tax exemptions for Connecticut and New Jersey residents are not subject to adjustment and remain at $2 million and $675,000, respectively.

For married couples who are residents of states with estate tax exemptions that are lower than the Federal exemption, a gift on the first death of the full Federal estate tax exemption may result in the imposition of a state estate tax. Such clients should contact us to discuss whether to revise their estate plan to avoid the possible imposition of this state estate tax.

Current Interest Rates

The “benchmark” rate for a grantor retained annuity trust (“GRAT”), that is, the minimum investment return necessary to pass wealth to the GRAT beneficiaries, is 2.2% in February 2016. The lowest rates for intra-family loans for February 2016 are .81% (for loans up to 3 years), 1.82% (for loans greater than 3 years and up to 9 years) and 2.62% (for loans greater than 9 years).

IRA Charitable Rollover Provision Made Permanent

The IRA charitable rollover provision allows an individual who has reached age 70½ to make a “qualified charitable distribution” from an individual retirement account (“IRA”) without treating the distribution as taxable income. Making a charitable gift directly from an IRA is typically more tax efficient than withdrawing funds from the IRA and then making a tax-deductible charitable gift. A distribution will be treated as a qualified charitable distribution only if it is made directly from the IRA to a public charity (other than a supporting organization or a donor-advised fund) or to a private operating foundation (not to a private non-operating foundation). A qualified charitable distribution will count toward satisfying the individual’s required minimum distribution. This rollover provision had expired at the end of 2014 but was reinstated at the end of 2015, retroactive to January 1, 2015, and made permanent for future years.

If you have any questions regarding this Alert or your estate plan, please contact any of the attorneys in the Private Clients Practice Group.