By: Tom Fafinski
“Nothing can be said to be certain, except death and taxes” -Benjamin Franklin
Not only are death and taxes certain, starting in 2013, death will carry higher taxes. Here is a run down of the important estate tax law changes set for 2013, absent Congressional action in an election year with a late year “lame duck” session.
Currently, any estate over the tax exemption [essentially net worth plus insurance], $5.12 million dollars, is subject to a 35% tax. There is also a 35% tax on gifts and generation skipping transfers. The current estate tax rules were the result of a compromise between the Republican Congress, wanting estate taxes to be 15% on anything over $5 million dollars, and the Obama administration, which wanted to extend unemployment benefits. The resulting compromise was only for a 2 year window. The window is closing at the end of 2012. Starting in 2013, the estate tax exemption drops to $1 million dollars. Any estate with a value over $1 million dollars is subject to a 55% estate tax.
No more portability of exclusions starting in 2013. Portability is in reference to the basic estate tax exclusion amount, currently over $5 million dollars. Any applicable exclusion amount which is unused at the death of the first spouse (“deceased spousal unused exclusion amount”) can be used by the surviving spouse in addition to the spouse’s own exemption. Before the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 the estate tax exclusion was not portable so this is not a new situation from a planning perspective.
Here are some things you should consider implementing before too long:
Irrevocable life insurance trusts which, if done correctly, remove the value of the life insurance out of your estate;
- Estate freezing techniques like family limited liability companies. These techniques seek to solve the problems associated with taxes on an appreciating estate all the while providing for discounting solutions for existing value; and
- Substantial gifts of up to $5 million dollars [even to spouses] or even implement a grantor retained annuity trust. To get maximum value, you must have it completed before the end of 2012 when the gift tax rules change with the estate tax laws.
Contact a professional and engage in some planning as it relates to these changes in estate taxes. There are also some major changes anticipated in the income tax arena that will warrant your planning attention, which we will touch upon in a later article.