Post-Fiscal Cliff Estate Tax Planning: Opportunities Abound

On New Year's Day, Congress acted to make the prior estate and gift tax regime permanent, with one small change - the estate tax rate has been increased from 35% to 40%. The rest of the estate and gift tax regime, including the $5 million (indexed for inflation) gift and estate tax exclusion amount and the favorable "portability" provisions, have been continued. In addition, the "annual exclusion" for gift tax purposes has increased (due to indexing for inflation) the tax free amount each person can gift to another person each year to $14,000.

For the past few years, many individuals have postponed updating their wills and trusts to take into account tax law changes because those changes were set to expire on January 1, 2013. The new year comes with good news: the wait is over. An estate plan review could help avoid unwelcome family discord after death. Estate plans can be updated to avoid significant unintended consequences that could be built in to documents prepared based on older, lower, exclusion amounts.

The current gift and estate tax rates and exclusion amounts are, when compared to the past few decades, very favorable to taxpayers. However, the tax bite is still very serious for larger estates, especially those that hold a concentration of illiquid interests in businesses or real estate.

Luckily, Congress has not acted (yet) on President Obama's proposals which would make several popular estate tax avoidance techniques ineffective. In other words, there are still many opportunities for individuals to plan in advance to reduce the impact of the estate tax.

Whether their goal is to replace out-of-date documents or to implement tax savings strategies, individuals should see Congress' resolution of prior uncertainty as a call to action. After all, what better New Year's Resolution can there be than to provide long term financial security for your loved ones?

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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