Here it is, January 2, and we’ve firmly established that we’re not going headlong over some theoretical cliff. There will be plenty of time to discover all of the unintended consequences and blatant lapses in judgment buried in the new law. Well, maybe not plenty of time, because it seems that Congress has, to some extent, kicked the can down the road and will be revisiting some or all of the recent “changes.”
In any event, my primary professional concern in this kerfuffle has been the fate of the federal estate tax. For two years, estate planners have been telling our clients that there was a limited window of opportunity to use some or all of the $5.12 million gift-tax exclusion that was granted via the last can to be kicked down this particular road. Indeed, many families acted on this advice and made significant gifts and employed advanced planning techniques to benefit their families.
In fact, The American Taxpayer Relief Act of 2012 keeps the current $5.12 million exemption in place. The difference, though, is that the top estate tax rate has increased to 40%. So, was all of last year’s hype and urging to “act now” for naught? The answer is emphatically no.
First and foremost, professional advisors should never recommend making ill-advised gifts solely because the tax code dictates a certain outcome. Part of the planning that goes into making significant gifts should include discussions of whether the proposed gift will both a) benefit the family in the long run and b) not disadvantage the donors in any way. As I always say, the tax “tail” should never wag the dog. Hopefully, all gifts made in 2011 and 2012 in consideration of the increased exemptions were made thoughtfully and carefully.
Second, the increase of the estate- and gift-tax rate to 40% has increased the value of gifts made in 2011 and 2012. Individuals that have taken advantage of the increased exemption over the past two years have just seen the value of their gifts increase solely by virtue of the higher tax rate that won’t be paid at their deaths. For families making significant gifts, the dollar value of that savings is considerable.
The final point I’d like to make is that the maintenance of the $5.12 million exemptions (and Maryland’s $1 million exemption) means that individuals and families should continue to be vigilant in their planning. Those who were contemplating making gifts in 2012, but fell short of the deadline, have a renewed opportunity to consider and complete those gifts. Those who did not consider making significant gifts might now give greater attention to the matter in light of the increased federal estate-tax rate. And those who have not recently reviewed their estate plans should make time to consult with their advisors and see if changes are appropriate.