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The Significance of Estate Planning Before 2013

| Jul 30, 2012 | News

In five short months, the unified gift and estate tax laws will undergo drastic changes and not for the better. On December 31, 2012, the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010 that increased the estate tax exemption to $5.12 million for 2012 and reduced the marginal estate tax rate to 35% will sunset. Therefore, unless Congress acts in the meantime, as of January 1, 2013 the exemption amount will be reduced to only $1 million and the marginal estate tax rate will increase to 55%. Given the divisive political environment in Washington, D.C., coupled with the Federal government’s revenue needs, it is difficult to predict with great certainty what the unified exemption amount will be after 2012.

What does this mean to you?

Many Americans that would not have previously had to consider federal estate tax under the $5.12 million estate tax exemption now must consider the potentially very costly tax. At a minimum, individuals with a potential estate exceeding $8 million and very elderly individuals with an estate substantially exceeding $1,000,000 may need to consider more aggressive estate planning prior to January 1, 2013 to take advantage of the high 2012 exemption amount. Don’t forget that a taxable estate includes assets that might not appear on a financial statement such as life insurance.

Should I gift away $5.12 million in assets in 2012 to take advantage of the exemption amount before it expires?

Many high net worth clients are asking us this question every day and the answer is always: it depends. It depends on many factors, including your liquidity, your primary purpose for gifting the assets and the distinctive composition of your family. For example, if your assets are primarily interests in a family business, it may be difficult to gift away $5.12 million in interests without losing control of the business or other unintended effects that may result from such a gift. Because each family and set of circumstances is unique, the primary purpose of your gift should be explored with your estate planning attorney and financial advisor prior to making a significant gift of your assets.

Conclusion

Because of the significant changes in the law on January 1, 2013, many Americans may now be subject to estate taxes at a rate of 55% for all estates exceeding $1 million in value. Therefore, you should consult with an estate planning attorney and your tax advisor to help you avoid or minimize your estate taxes to ensure your estate isn’t left owing a substantial bill to the IRS. If you have any questions about estate planning, we would encourage you to call or schedule an appointment to visit with us.