Estate Planning Newsletter
Estate Tax Changes Bring Calm After the Storm
Much to the relief of many, the American Taxpayer Relief Act of 2012 (“2012 Tax Act”) was enacted in the beginning of 2013, making permanent many of the tax benefits that were scheduled to expire at the end of 2012. The beginning of 2013 heralded an increase in the lifetime estate and gift tax applicable exclusion amounts (or exemptions) to $5,250,000, indexed for inflation in the future. This means that an individual passing away in 2013 may have up to $5,250,000 million in their estate without their estate being subject to federal estate tax. A married couple may have up to $10.5 million in their estate ($5.25 million each) before their estate is subject to federal estate tax.
The 2012 Tax Act brought certainty regarding the applicable exemptions and estate tax rates. Before the 2012 Tax Act became law, the estate tax exemption was scheduled to drop to $1,000,000, and the maximum transfer tax rate was scheduled to increase to 55%, with an extra 5% surcharge for a portion of larger estates. High net worth individuals were uncertain as to how to proceed with their estate plan.
Estate Planners Reaction to Past Uncertainty
During the recent period of uncertainty, most estate planning practitioners advised clients to give careful consideration of the various possible tax scenarios that may exist at the time of a death and devise an estate plan that provided for flexibility under each scenario. Some estate planners waited to see how Congress and the President would react before committing to certain estate planning strategies. And other estate planners, with clients of advanced age or failing health, opted to commit to a plan of action before their client lost the ability to create an estate plan due to incapacity.
Impact of the Estate Tax Change on Your Estate Plan
If you already have an existing estate plan, it is highly advisable to consult with an experienced estate planning attorney to determine if your plan still accomplishes your estate planning goals or if it is in need of revision, especially if your existing estate plan uses a formula clause to determine the amount of the estate funding an Exemption or Bypass Trust.
For example, you may have a revocable living trust that you created in 1999, when the applicable exemption amount was $650,000, naming your children from a previous marriage as the beneficiaries of an Exemption Trust, with the balance of the estate passing to your current spouse. If you passed away in 2013 with an estate of $6 million, your children would receive $5,250,000 and your spouse would only receive $750,000. This example illustrates how a change in the estate tax exemption can have unintended consequences on the disposition of assets from an estate.
Seek Experienced Estate Planning Counsel
If you have an existing estate plan and are unsure as to whether the recent estate tax changes may impact your estate plan, or if you have avoided planning because you were uncertain as to the outcome of the estate tax law, you should seek the advice of an experienced estate planning attorney in your area. You may think that if your estate is less than the estate tax exemption you do not have to concern yourself with estate planning, but everyone, regardless of the size of their estate, can benefit from some form of estate planning.