In this article, you will get insight into the current estate planning environment in Wisconsin and the changes that have made it better. By “better,” I mean that people who are engaged in estate planning right now have far more freedom in design than they have had in the past. For the most part, this improved environment is attributable to recent changes to the federal estate and gift tax (a 40% tax on property gifted during life and owned at death), but not exclusively. Some important and helpful changes have been made in Wisconsin.
The principal changes include:
- Great increase in 2010 in the unified credit which now exempts $5,450,000 from the federal gift and estate tax
- Unlimited marital deduction in the computation of the tax
- “Portability” – a new rule that permits the amount of the unified credit that the spouse who is first to die, didn’t use, to be used by the surviving spouse
- Adoption in Wisconsin of the marital property (or community property) rules
- Stepped-up basis for both the deceased spouse’s and the surviving spouse’s halves of community property to fair market value at the death of the first to die
Over the course of my career, I have been privileged to do estate planning for couples with long-term and stable marriages. The coming together of these changes has meant that couples in these marriages have many more alternatives and can more easily shape their estate plans to meet their objectives in disposing of their property by gift and on death. The tax cost of doing so is greatly reduced and more under their control.
Consider a married couple with $10,900,000 of property, who haven’t used their unified credit on gifts. Under Wisconsin marital property law, they can “opt-in” and treat all of their property as marital property. That can be very good. At the death of the first to die, all of the couple’s property would take a fully stepped-up basis for income tax purposes.
But without portability, if the first to die — for purposes of this example, we will say the husband — would leave all of his property to his surviving wife, at the wife’s death, $5,450,000 would be subject to the death tax, because she would only have her unified credit to reduce the tax attributable to the full $10,900,000 of property. So, before portability, his assets would be put into a “by-pass” trust that would not be subject to tax at the wife’s death with all the associated costs and limitations, including the absence of stepped-up basis on the assets in the trust at the wife’s death. Portability became law in 2010, though only became permanent in 2012. With portability, he can leave all of his property to her outright. At her death, she will have a unified credit of $10,900,000 to apply in the computation of the estate tax and get a full stepped-up basis for income tax purposes.
Again, this would not be possible without the unlimited marital deduction. Until 1981, the marital deduction was limited to half of the decedent’s adjusted gross estate — essentially, assets minus liabilities. It was only then that tax policy makers appreciated that there was no sense taxing an estate at the death of the spouse first to die. Instead the gift and estate taxes should be inter-generational.
Changes in Unified Credit Exemption Amounts:
2000 – $675,000
2002 – $1,000,000
2009 – $3,500,000
2010 – $5,000,000
2016 – $5,450,000
In the year 2000, only $675,000 was excludable. By 2002, this amount was $1,000,000; by 2009, it was $3,500,000. In 2010, the unified credit was increased to $5,000,000 and indexed, though this really did not become permanent until late 2012. Which is why it is $5,450,000 in 2016. This had the effect of eliminating both the death tax for thousands of people, and the social costs associated with efforts to avoid the tax and the arrangements put in place to do so. For many, these changes in the unified credit have created the freedom I have mentioned.
Also in 2012, the $1,000,000 limit on using the unified credit on gifts was eliminated. Which means that people can gift property without federal gift tax up to the overall unified credit amount, $5,450,000, without the separate arbitrary limit of $1,000,000 restraining them. Again, this created degrees of freedom for taxpayers to make gifts property without attracting tax.
Wisconsin has done its part. It has long since eliminated its gift and inheritance taxes, phasing them out in the early 90s, and eliminating its so-called “decoupled pick-up estate tax” in 2012. There are many states that have not done so, such as Illinois and New York. To ease the process of passing property on death, in 1985 Wisconsin adopted the so called “Washington Will” which enables a married couple to pass property without probate by simply providing so in their marital property agreement, thus reducing the scope of probate. Wisconsin has since created a similar device for singles. And, as I mentioned earlier, it has permitted couples to “opt-in” to marital property, thereby creating opportunities for significant basis step-up at the death of the first to die.
“Washington Will” — Enables a married couple to pass property without probate by simply providing so in their marital property agreement, thus reducing the scope of probate.
What I have described is greatly simplified. For example, there are certain assets for gifting when marital property is unwise, and there are other implications in taking these steps. For those whose assets are sufficiently greater, exposing them to the estate and gift tax poses problems and opportunities, including a generation skipping transfer tax that requires attention. However, this estate planning environment is far better than it has been in the past. If you should need assistance in estate planning we would be happy to assist.
