Estate Planning 2012 - What Changes Should Be Made to Your Estate Plan?

by Jaburg Wilk
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[author: Beth S. Cohn, Esq.]

With the uncertainty in the Estate Tax and Gift Tax Laws, coupled with an election cycle, many people are faced with the decision of what approach is best for both their estate plan and tax savings strategies in 2012.    There are planning opportunities in 2012, regardless of actions that may be taken by Congress.  This article will explain the Estate Tax, Gift Tax, and Generation Skipping Tax (“GST”) Laws in effect in 2012 and what will happen in 2013 (and beyond) if Congress does not extend the Estate Tax, Gift Tax and GST Laws which are currently in effect. The scope is simply an overview of the current law and potential changes.

Estate Tax, Gift Tax and GST are all transfer taxes.  The Estate Tax is applicable to the transfer of wealth upon death.  The Gift Tax is applicable to transfers of wealth during lifetime.  The policy behind the GST is that wealth is taxed at every generation.  For example, if a person attempts to skip his or her children and pass their estate on to their grandchildren, with certain limitations and exceptions, there is a tax in addition to the Estate Tax imposed due to the “skip” of a generation.  The GST applies to both a lifetime gift and a transfer on death to a “skip” person.  GST exemption planning allows families to pass wealth to multiple generations in trust without the amount of the GST exemption and/or the appreciation of the exemption, being subject to estate tax in the estate of the beneficiaries.  For example, a GST exemption trust is set up for children and the children get trust benefits during their lifetime.  When they die, there is a trust set up for the benefit of their grandchildren, continuing for many generations.  This is sometimes called a “dynasty trust” or dynasty planning”.

SUMMARY OF PRIOR ESTATE GIFT TAX AND GST LAWS

In 2001, Congress enacted a gradual repeal of the Estate Tax Laws.  Every person has a lifetime exemption from Estate Tax and Gift Tax.  The Estate Tax exemption was increased gradually from 2001 - when it was $1 million per person - to 2009 when it became $3.5 million per person.  The highest tax rate for an estate in excess of the exemption was gradually decreased in the same time period from 55% to 45%.  Gift Tax is a separate and different tax from Estate Tax. The lifetime exemption for making gifts is $1 million and it did not increase.  The highest Gift Tax rate was 55% of the amount over the $1 million lifetime Gift Tax exemption.

Estate Tax was repealed for one year in 2010.  At the end of 2010, an estate had the option of electing Estate Tax repeal, or having a $5 million lifetime exemption.  Gift Tax was not repealed, and the $1 million lifetime exemption remained in effect, with a flat tax of 35% for gifts in excess of $1 million.  At the end of 2010, the Estate Tax Laws were scheduled to go back to the 2001 levels.    

While GST was not technically repealed in 2010, the tax rate in 2010 for the GST was 0%, with a $5 million GST exemption.        

SUMMARY OF ESTATE, GIFT AND GST TAX LAWS IN 2012

In December, 2010, Congress changed the Estate Tax, Gift Tax and GST Laws just for 2011 and 2012.  Unfortunately, this is only a two year change, with Estate Tax and Gift Tax Laws in 2013 reverting back to what they were in 2001.

ESTATE TAX LAW IN 2012

In 2012, every person has a lifetime exemption from Estate Tax in the amount of $5.12 million.   This means that a properly planned estate for a husband and wife can have an estate of up to $10.24 million without paying any estate tax.   When many people hear this number, they think that they don’t have to do any estate planning, because their estate isn’t near $5 million (or in the case of a married couple, near $10 million). 

If a husband or wife dies in 2012 and does not use up their entire lifetime exemption from Estate Tax, the deceased spouse’s unused exemption amount (“DSUEA”) can be used by the surviving spouse, but only if both spouses die in 2012.  In an interesting nuance, DSUEA is for the last spouse the surviving spouse was married to in 2012.  It the event that the surviving spouse remarried AND the surviving spouse also died in 2012 and then the new spouse would have benefit of DSUEA (although they would also need to die in 2012).  The use by a surviving spouse of DUSEA is called “portability” and can only be elected by the surviving spouse filing a timely estate tax return.

GIFT TAX LAW IN 2012

The lifetime exemption for Gift Tax was also increased to $5.12 million for 2012.  The Gift Tax is a 35% flat tax over $5.12 million.

In addition to the lifetime exemption, annual exclusion gifts in the amount of $13,000 can be given to any number of people.  Unlimited direct gifts can be made, without taking into account the annual exclusion amount, for direct payments for health care expenses or education of the donee.  This is a valuable technique for grandparents who want to pay these expenses for their grandchildren and not worry about exceeding the annual exclusion amount.

GST LAW IN 2012

Everyone has an exemption from GST in the amount of $5.12 million.  The tax rate for any transfers that “skip” a generation is 35% over the GST exemption amount. 

CHANGES SCHEDULED FOR 2013

If Congress does not make any changes in 2012, the lifetime exemption for the Estate Tax and the Gift Tax will be reduced back to the $1 million level that was in place in 2001, with a graduated tax rate up to 55%.  The GST Exemption is to be approximately $1.35 million (by statute the GST exemption is subject to a cost of living adjustment).  With the Presidential election coming up this year, it is highly unlikely that Congress will make any changes to the Estate Tax, Gift Tax or GST Tax prior to the election cycle.
 

PRESIDENT OBAMA’S PROPOSALS

As part of the current Administration’s budget proposal in 2012, the following changes were proposed, but were not passed:

  • $3.5 Million Estate Tax lifetime exemption
  • $1 Million Gift Tax lifetime exemption
  • $3.5 Million GST exemption
  • Make portability of DSUEA permanent
  • Eliminate discounts of gifts of minority interests in family controlled entity to a family member
  • Limit the GST exemption to 90 years
  • Elimination of some sophisticated gifting techniques, which have allowed taxpayers to shift wealth during their lifetimes outside the transfer tax system

PLANNING IDEAS FOR THE REST OF 2012

If the Estate is substantial, up to $5.12 Million of the lifetime exemption can be used.  One unanswered question is what happens if the Lifetime Exemption is reduced to something less than $5.12 Million upon death.  It is unlikely that Congress would force decedents’ estates that took advantage of the lifetime exemption in 2012 to lose that benefit on death after 2012.

Even if the Lifetime Exemption is not reduced back to $1 million, gifting will remove appreciation from the estate.  When gifts are made, donors can still take advantage of appropriate valuation discounts.  There have been several proposals before, going back to the Clinton administration, to remove valuation discounts from family gifting.  However, none of them were passed.

For estates with net worth of between $2 million and $10 million there is an opportunity for planning.  If no planning is completed and the lifetime exemption is reduced from its current levels, there is the possibility that will be an estate tax liability.

For people with very large estates, if gifts are made in excess of the lifetime exemption amount, paying gift taxes at the current 35% level would provide tax savings.  The amount of the gift tax is removed from the estate.  It is less expensive to pay gift tax than to pay estate tax as gift tax is paid from “pre-tax” dollars while estate tax is paid from “after tax” dollars.

There are other lifetime transfer techniques that are available for high net worth individuals.  These techniques can remove appreciation from the estate.  These are sophisticated estate planning techniques and require using planning professionals.  Not only are special assets required but also special circumstances.

There are reasons to consider estate planning that do not relate to tax reasons.    Liquidity planning, care of family members, special needs, and business succession planning are all valid reasons to update an estate plan.

CONCLUSION

It is highly unlikely that there will be any changes to the Estate Tax, Gift Tax and GST laws prior to the November 2012 election.  When evaluating the amount of your estate, you need to prepare a balance sheet of all of your assets, including life insurance that you own and control as well as retirement plans in which you are the participant.  Many people are surprised at the value of their estate, for estate tax purposes, because they didn’t include these items.

Depending on your circumstances, there is a level of estate planning that is appropriate for you and your family.  You should not shy away from planning because you believe that your estate is not large enough.  An estate plan is tailored for you, your family and your specific needs.  Doing nothing may create difficult personal issues as well as tax consequences for your family which could be avoided with proper planning.

About the author: Beth S. Cohn is a shareholder at the Phoenix law firm of Jaburg Wilk where she assists clients with business, tax, gifting programs, succession planning, asset protection and estate planning. She chairs the business law department and is a State Bar of Arizona certified tax specialist and a CPA. Beth can be reached at 602.248.1030 or bsc@jaburgwilk.com.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that, to the extent this communication addresses any tax matter, it was not written to be and may not be relied upon to (i) avoid tax-related penalties under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein.


 

 

 

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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