End of the Year Creates Estate Planning Opportunities

by Brian A. Boys

The holiday season is upon us. For many, this means it is time to begin planning for Thanksgiving dinner, or to find that perfect gift for a friend or family member. It also means that a special opportunity that Congress has given U.S. citizens is about to come to an end.

The opportunity that I am talking about is the upcoming expiration of the current $5.12 million estate and gift tax applicable exclusion amount. Before telling you more about the importance of the opportunity, I’ll provide some background. In December of 2010, the 2010 Tax Relief Act was enacted. The law is a two year patch that set the 2011 unified estate and gift tax applicable exclusion amount at $5 million per person (with annual inflation adjustments to the current amount) and the top tax rate of 35%. If Congress does not act, the current law will expire on December 31, 2012, and the exemption amount will drop to $1 million with a top tax rate of 55%. This means that if you die in 2012, so long as you have not given away or die with more than $5.12 million in assets, then you will incur no estate tax. If you have the good fortune of surviving the year, then your reward may be that this amount plummets to $1 million, and your estate may have to pay Uncle Sam up to 55 cents of every dollar above this amount.

So what does this mean? If you think that you have a taxable estate, then this may be a one time opportunity to reduce the size of your estate and not incur taxes for doing so. If you have not used any of this exclusion amount, then you can give away up to $5.12 million before the end of the year and pay no gift tax (a married couple can give away up to $10.24 million). Also, any gifts made in excess of these amounts are subject to a relatively low gift tax rate of 35%, instead of 55% that takes effect in January. Making significant gifts in 2012 is an attractive way to reduce your transfer taxes that you would otherwise almost certainly pay in the form of an estate tax later on.

You may be thinking to yourself that you have nothing to worry about, and that even if the current law expires, you still won’t have any concerns. After all, $1 million is a lot of money. If so, I caution you to take inventory of your assets and recognize that while $1 million may seem like a lot of money, once you add the value of your home, life insurance policies, retirement and investment accounts, and other assets, one’s estate can easily eclipse this amount. Your current estate plan may not take this reduced level into account, and therefore your estate may suddenly be subject to estate tax liability should you pass away in 2013. It is important to note that prior to the 2010 Act, the estate tax exemption amount was $675,000 in 2001, and slowly increased to $3.5 million in 2009, so many estate plans prepared prior to the most recent change in law may no longer be applicable.

True skeptics may be thinking that this will never happen, that Congress will surely act so that this scenario does not occur. Of course, who would have thought that Congress would not have acted at the end of 2009 when the prior law called for a total repeal of the estate tax beginning in 2010? Nobody did, only that’s just what happened, resulting in there being no estate tax in 2010.

Regardless of the size of your estate, it is important that you consult with an experienced estate planning attorney now to find out what opportunities may exist for you during these last two months of the year, and what adjustments you may need to make to your estate plan to account for the changes that may occur in 2013.

Contact Oast & Taylor to schedule an appointment with one of our experienced estate planning attorneys to review your existing plan or to establish an estate plan for you.