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Estate Taxes and the New Tax Bill: More and Less Certainty | Business

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Estate Taxes and the New Tax Bill: More and Less Certainty
Estate Taxes and the New Tax Bill: More and Less Certainty


The estate planning measures passed in the Middle Class Tax Relief Act of 2010 beg the question "what do we do now?"  This new bill reinstates the estate tax with an exemption amount of $5 million dollars for an individual and a maximum estate tax rate of 35% on values above the exemption amount.  Married couples will have the ability to pass $10 million dollars of assets before any estate tax will be due.  In addition, all assets included in an estate will have their basis automatically "stepped-up" to fair market value.  This means that assets will likely have no capital gains tax if they are sold soon after death since their value is stepped-up.  The generation skipping tax exemption was also increased to $5 million dollars.

Does this mean that single persons with less than $5 million dollars and married couples with less than $10 million dollars no longer need to worry about estate planning?  Sadly, the answer is no.  This new tax bill only lasts through December 31, 2012.  Without further changes, the estate tax exemption amount will again be set to automatically revert to $1 million dollars with maximum tax rate of 55% on January 1, 2013.  Therefore, year 2012 will be similar to this year in that Congress will have to again address the estate tax and many will be wondering whether they need to revise their estate planning documents yet again.

A constantly changing estate tax exemption amount makes it incredibly difficult for individuals to plan for their estates.  They must be asking certain questions.  First, has the changed estate tax exemption amount altered how I leave my assets to my intended beneficiaries?  The answer is almost certainly yes if you have a formula bequest clause.  Bequests under a formula clause alter the amount of the bequest to the exemption amount, between $1 million and $5 million dollars.  This variance could cause one to unintentionally disinherit a family member, including a surviving spouse.

Another question is what should I be doing about life insurance with a frequently changing estate tax exemption amount?  Many people who have life insurance to help pay estate taxes may feel that they no longer need such insurance.  If the exemption is lowered in the future, will obtaining the same insurance two years from now be affordable?  Will you even be able to obtain the insurance if you have medical issues that have arisen?  The most conservative approach would be to obtain the insurance now or maintain currently held insurance until there is a more definitive answer.

What we do know is that the new tax law unifying the gift and estate tax is a boon to individuals or couples who have more assets than they require to sustain themselves during their remaining lifetimes. Wealthy individuals who have already used their $1 million dollar gift exemption in previous years will now have an additional $4 million dollars ($8 million for a married couple) that they can use presently.  This will allow individuals to pass vacation homes to their children, assist them with purchasing their own homes or paying off debts to allow children to have better cash flow.

This new change has dramatically increased the planning opportunities for such wealthy individuals.  Trusts can now be created to hold assets in much larger amounts that will not only be excluded from estate tax at the death of the owner of such assets, but will also be excluded from estate tax at the death of descendants of such owners.  If it appears that the exemption amount will not be renewed or will be reduced in the future, then wealthy individuals can take advantage of the fact that they can give up to $4 million dollars more during their lifetime and do not have to wait until their death to be able to transfer such assets.  This can be a savings of roughly $2 million dollars ($4 million for married couples) in future estate taxes.  The individual should wait until the end of 2012 to make such a gift, as it is still more advantageous to inherit assets rather than receive them by gift.  Assets received by gift do not receive the preferential stepped-up basis.

While the new tax law appears to be beneficial to everyone from a tax perspective, the fact that the new law is not permanent extends the uncertainty in planning for two more years.  High net worth individuals have the means to pay to alter their estate planning as the law changes.  Middle income people are more reluctant to incur a repeated expense.  It is advisable to develop a current plan to meet the needs and intentions of the individual, whether the exemption amount is $5 million or $1 million dollars.  Failure to do so could ultimately cost their estates a great deal more than the legal fees.