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by Thomas S. Groth, Esq.

The only thing we have to fear is…the certainty of death and taxes.

However, if I may be so bold, if you look at death as simply a change, a blossom into an unknown that we aren’t supposed to know, a time to slip into another mysterious veil, a time  to blossom into being a become a limitless spiritual being, a time to get our jollies by to scaring the living crap out of our old business partners for being cheaper than we were, well, death isn’t so bad.


estate tax rates

Marley displaying anger with Scrooge because employees not given observed Veteran’s Day off.

But what about taxes?

Well, if you’re dead, then taxes aren’t much a concern.

So now you feel better. And that’s what we’re good at, here at the IRSMedic World HQ. To give you perspective. 

But what to do with this horrible surplus of time (known as our life expectancy) that we have to deal with  until we get to die?  Oh what to do. What to do…

 

Estate Tax Rates and Exemptions for 2013

Let’s say you and I talk about uncertainty. The future of the “death tax” is up in the air. I’m going to go over some of the proposed changes in the Estate and Gift Taxes and what they might mean for you, how you can plan in anticipation of these changes, and what could happen if you don’t.

Take a trip back with me to 2010. You might remember that George Steinbrenner’s Estate saved a ton of money because he died during a year when the Estate Tax was expired. After that one year reprieve, the Estate Tax was set to jump to 55% with a $1 million dollar exemption. But our government did what it does best – Republicans and Democrats traded more spending for more tax cuts. Unemployment benefits were extended for 13 months, the exemption from Estate and Gift Taxes was lifted to $5M for 2011 and $5.12M for 2012, and the Bush Tax Cuts were extended through 2012 . So now, almost 2 years later, we’re back where we started. If congress fails to act, if a deal can’t be struck, things could get ugly.

Let’s start with the worst-case scenario and move on from there. Without government action:

  • Estate and Gift Tax exemption will fall from $5.12M to $1M

    • That means: An individual will be able to give away (or die owning) $1M in assets during his lifetime tax-free; a couple will be able to give away $2M, down from $10.24M.

  • Generation-Skipping Transfer (GST) Tax Exemption will fall to $1.34M

    • That means: Gifts (either lifetime or by will) to grandchildren and others defined as “Skip-persons” for purposes of the GST Tax will be taxed after the first $1.34M. The GST tax is imposed in addition to any Estate/Gift Taxes charged on the transfer.

  • Highest Estate/Gift Tax rate will increase to 55% (from 35%)

    • That means: in addition to having less of an exemption to work with, taxpayers will be required to shell out more in taxes for every dollar of gifts/bequests made to their friends and family members.

President Obama sent Congress a budget proposal on February 13, 2012 that takes a slightly different approach to the issues laid out above.

These are the changes proposed by the President

  • Estate Tax Exemption of $3.5M instead of the automatic drop to $1M

    • That means: Individuals will be able to devise up to $3.5M by will. The current law allows for portability, which the President’s proposal preserves. If this proposal becomes law, then a surviving spouse will be able to exclude assets from his/her estate in the event that the first-to-die spouse has an estate of less than $3.5M.

  • Gift Tax Exemption of $1M

    • That means: The ability to avoid Estate/Gift taxes by making lifetime gifts will be dealt a severe blow if this proposal is adopted. Currently, the “unified credit amount” allows couples to take advantage of lifetime gifts to give away assets that they expect to appreciate over time and to avoid probate. Under the president’s proposal, Estate Planning Attorneys will need to ensure that more assets are taxable as part of an individual’s estate at the time of his/her death instead of being taxable as lifetime gifts. This decoupling of the Gift/Estate tax exemptions will make planning more difficult, but it will not and should not keep wealthy taxpayers from using gifting as a integral part of Estate Planning.

  • Generation-Skipping Transfer Exemption of $1.34M

    • That means: if you are going to set up a trust to provide for future generations of descendants, it will be a lot harder to do after 2013. Both under the President’s proposal and the automatic reset of the Estate/Gift Tax laws will have the same result on those seeking to avoid an additional tax on gifts/devises to younger generations.

  • Estate/Gift Tax Rate of 45%

    • That means: President Obama’s proposed a rate that is lower that the rate that will automatically go into effect for gifts/devises starting in 2013. But the rate is higher than it is right now.

  • Grantor Retained Annuity Trusts – Term increased to 10 years

    • That means: a popular method of planning is going out the window if this change takes effect. Right now, a method is available whereby the creator of a trust can “retain” an annuity from the trust for 2 years, reducing the value of the actual “gift” he makes to the trust by the value of the annuity. As long as the trust pays the Grantor an appropriate amount of interest and principal over the two-year term, then it is as if he did not make much of a gift at all. By increasing the term of the GRAT to ten years, the value of the GRAT is diminished greatly.

  • IDGT Trust is Basically Eliminated as an Estate Planning Tool

    • That means: the benefits to creating a trust where the Grantor pays the income tax on the income of the trust will be eliminated through various disincentives built into the Estate Tax Code.

  • The end of Dynasty Trusts

    • The GST exemption would only apply for 90 years following the creation of a trust. As a result, wealthy families will no longer be able to shelter assets by making use of the GST exemption for future generations to come.

The bottom line is this: if you have more than $1M in assets, you should start planning today. If you wait until after January 1, 2013, you may find that your options are severely limited. Plan ahead and you can keep your hard-earned wealth out of the hands of the government in the hands of those you love the most.

This bears repeating, in bold: If you have more than $1M in assets, you should start planning today. If you wait until after January 1, 2013, you may find that your options are severely limited. Plan ahead and you can keep your hard-earned wealth out of the hands of the government in the hands of those you love the most.

Nope, that’s not quite it. Let’s use a bigger font:

If you have more than $1M in assets, you should start planning with a tax professional today. If you wait until after January 1, 2013, you may find that your options are severely limited. Plan ahead and you can keep your hard-earned wealth out of the hands of the government in the hands of those you love the most.

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1 Comment
  1. The sum and substance of this excellent article is that the favorable provisions of the law are going to expire on 12/31/12 unless the Congress and the President work something out. It does not appear that the proposed cures will restore the favorable provisions. Thus when Mr. Groth says consult the tax professional now then you should CONSULT THE TAX PROFESSIONAL NOW. The danger is not in waiting until 12/23/12 to act; the danger is not consulting him TODAY. The Tax professional is not going to be able to review your situation and devise the correct situation in a day or two. He will have to give your matter careful consideration and will require some time to find and implement a solution. If he has other clients coming to him with a similar estate problem he may not be able to get to yours. Thus you will be stuck with counting down the days until you lose a considerable portion of your estate knowing that you could have cured the problem.

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