Continued uncertainty due to Congress's delays
As I said last year, one of my primary objectives is to ensure that my clients are comfortable with the estate plan they have formulated. However, the current state of the estate tax law continues to make it very difficult to achieve that objective. Congress continues to delay addressing the federal estate tax issue, and clients continue to be skittish about making estate planning decisions.
Presently (in 2012), a U.S. citizen can give away assets worth $5,120,000 ($10,240,000 per couple) without having to pay any federal estate tax or gift tax (note: non-resident aliens and certain green card holders are still subject to a lifetime limit of only $60,000!).
However, these lifetime exemptions are scheduled to revert to $1,000,000 ($2,000,000 per couple) at the stroke of midnight on December 31, 2012. The tax rate on gifts over those amounts will also increase from the present cap of 35% to a whopping 55%.
Now is the time to act!
Despite the uncertainty that many of my clients feel as a result of the current federal estate tax situation, if your estate is likely to be worth more than $1,000,000 ($2,000,000 if you're married), now is the time to act: every dollar you give away this year (while the exemption is high) is one less dollar on which your heirs will pay taxes. Of course, you need to keep enough assets so that you don't run the risk of running out of assets yourself. But assuming that you're not likely to run out of money during your own lifetime, you can make sure your heirs aren't stuck with paying taxes needlessly.
If you're concerned that your beneficiaries are too immature to be able to handle a windfall, you can make the gifts in trusts for their benefit.
If you plan to make large gifts this year, I urge you to act quickly ... although it is unlikely that Congress will pass an estate or gift tax bill before the election, they might. And if they lower the lifetime exemption, you will lose out on the opportunity to pass these assets along tax free.
In addition, as we come closer to the end of the year, more people will be scrambling to lock in these exemptions by making large gifts. Based on my present volume of work, I anticipate that anyone who hasn't made an appointment for advanced gifting within the next 30 days will risk not having it done by the end of this year.
Even if you are not in a position to give away $5 million or even $500,000, I encourage you to take some steps to protect your loved ones. So here are a few basic estate planning tips for anyone who is leery about putting together a comprehensive estate plan.
Make a Will – At the very least, everyone should have a will. A will allows you to set forth how you want your property distributed upon your death. Having a will insulates your estate from being conveyed according to the laws of intestate (death without a will) succession.
Take Advantage of Available Exemptions – Each spouse may legally claim up to $5.12 million dollars of property as exempt in 2012. This may change depending on what Congress does. Regardless, you should use every penny of the available exemption to your advantage.
Maximize Your Exemptions – Creating a credit shelter trust (an "A-B Trust") is one of the best ways to maximize the available estate tax exemption. A credit shelter trust allows you to fund the trust with assets equal in value to the available federal estate tax exemption. Any other assets you have may be left to your spouse free of estate taxes. Your spouse can draw from the trust’s assets while s/he is alive. Upon his or her death, the trust assets will be disbursed to your heirs or other beneficiaries, claiming your estate tax exemption. Your spouse’s estate will also be able to reduce or avoid estate taxes at the time of distribution to his or her beneficiaries.
Purchase Life Insurance in an Irrevocable Trust – If your irrevocable trust purchases a life insurance policy, the life insurance proceeds will be distributed to the named beneficiaries estate-tax free upon your death. On the other hand, if you purchase a life insurance policy and hold it yourself as the “owner”, the proceeds will be part of your estate and subject to estate tax at up to the maximum tax rate (which is scheduled to revert to 55% in 2013).
Give, Give, Give – My grandmother always told me that it is better to give than to receive. For purposes of avoiding or reducing estate taxes, this is especially true. You can give up to $13,000 per year to as many people as you like without paying gift taxes. By giving more during your lifetime, you lower your heirs’ and beneficiaries' exposure to estate taxes.
Whether you have few assets or a multi-million dollar estate, you must have an effective estate plan. As a certified estate planning, trusts, and probate law specialist (certified by the California State Bar Board of Legal Specialization), I have the skills and knowledge to handle complex estate planning matters. To schedule a consultation to discuss your estate planning goals and needs, please contact us.