The Federal Estate Tax:Only the Wealthy Need Apply!

The big sticking point and the issue that made the most news from the tax deal last December was that the estate tax exemption would be raised to $5 million per person. The tax rate after that is 35%.

This is a far cry for the “no Estate Tax” of 2010 and the $3.5 million of 2009.

If you think this brings certainty, think again! This deal is only good through 2012 so once again, estate planners and our clients may have to wrestle with this again next year!

There is some real news, though. The gift tax exemption was also raised to $5 million, keeping it in sync with the Estate Tax. For several years, even when the estate tax exemption was $3.5 million, the gift tax exemption stagnated at $1 million. This encouraged families to make their gifts at death. The raise to $5 million, unifying the exemption, encourages gifts during life, especially for appreciating property.

So, even if things change in 2013, the appreciation would be out of the donor’s estate.

My concern is that people will give gifts and the law will change, taking back some of the benefits. Most people are not inclined to give major gifts unless there is a strong incentive. The continued uncertainty makes planning that much more difficult.

The new $5 million exemption also requires families to look at their old Trusts and Wills that may have used certain clauses that gave family members the “exemption amount”. As recently as 2008 that was $2 million.

The new law does give wealthy same-sex couples a good opportunity to move money around without taxation. It also allows “portability” for a surviving spouse to use whatever part of the exemption that the deceased spouse did not use. This may discourage the use of Trusts which can be problematic since trusts serve so many more purposes than just Estate Tax avoidance. Also, the portability provisions are not automatic: An Estate must file an Estate Tax return, whether or not taxes are due, to take advantage of portability.

Are you off the hook if your estate is less that $5 million? Only until 2013 when all bets are off. So stay tuned; and in the meantime, make sure you address the issues that do apply to you such as Asset Preservation, Long Term Care Needs Planning and planning for Incapacity.

If you have a taxable estate, please give us a call so we can discuss with you the best ways to reduce or eliminate your estate tax liability.

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