Fiscal Cliff Tax Changes Provide Great Estate Planning Opportunities for Americans
By Martin Hersh, Esq.
As you probably know, Congress avoided the so-called fiscal cliff by passing – at the 11th hour – the American Taxpayer Relief Act of 2012.
The 2012 Tax Act makes several important revisions to the tax code that will affect estate planning for the foreseeable future.
Most importantly, the passage of the 2012 Tax Acts has increased certainty in estate planning with “permanent” laws
Just as significant, for most Americans, the new law has removed the emphasis on estate tax planning and put it back on the real reasons we need to do estate planning: taking care of ourselves and our families the way we want.
Some of the benefits of the major changes in estate planning tax provisions of the 2012 Tax Act include that it protects you, your family, and your assets in the event of incapacity, ensures your assets are distributed the way you want; protects your legacy from irresponsible spending, a child’s creditors, and from being part of a child’s divorce proceedings; provides for a loved one with special needs without losing valuable government benefits; and helps protect assets from creditors and frivolous lawsuits. And for those with larger estates, there remains ample opportunities to transfer large amounts tax free to future generations.
The downside of the 2012 Tax Acts: There were several income tax rate increases on those earning more than $400,000 ($450,000 for married couples filing jointly).
What follows is a brief description of some of these important revisions – and their impact:
- The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012.
- The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at your death) to grandchildren and others who are more than 37.5 years younger than you; in other words, transfers that “skip” a generation. Having this exemption be “permanent” allows you to take advantage of planning that will greatly benefit future generations.
- Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10+ million through lifetime gifting and at death.
- The tax rate on estates larger than the exempt amounts increased from 35% to 40%.
- The “portability” provision was also made permanent. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up a trust specifically for this purpose. However, there are still many benefits to using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by th
e surviving spouse.
Separate from the new tax law, the amount for annual tax-free gifts has increased from $13,000 to $14,000, meaning you can give up to $14,000 per beneficiary, per year free of federal gift, estate and GST tax – in addition to the $5 million gift and estate tax exemption. By making annual tax-free transfers while you are alive, you can transfer significant wealth to your children, grandchildren and other beneficiaries, thereby reducing your taxable estate and removing future appreciation on assets you transfer. And, you can significantly enhance this lifetime giving strategy by transferring interests in a limited liability company or similar entity because these assets have a reduced value for transfer tax purposes, allowing you to transfer more free of tax.
Whether you have been sitting on the sidelines, waiting to see what Congress would do in terms of estate planning, or you have just not taken care of important estate planning for your family and your business, the wait should now be over now.
Now there is no excuse to postpone your planning any longer or to review what you have in place. Remember, with Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated.
Thus, it is best to put these strategies into place now so that they are more likely to be grandfathered from future law changes.
Schedule a free consultation today by calling my office at (845) 292-9345.