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The Top Ten Reasons You Need to Do Estate Planning in 2012
Does it seem like you are hearing more about estate planning lately?
Well, you probably are. The financial press and estate planning
professionals (lawyers, CPAs and financial advisors) have all been
working hard to get the word out that people need to act before the end
of the year to take advantage of an unprecedented, and perhaps even
historic, opportunity in estate planning.
It’s a simple message, but one with tremendous impact: For the rest of
2012 only, which is quickly coming to a close, every American can
transfer up to $5.12 million* free of federal gift, estate, and
generation-skipping transfer tax.
* Minus certain gifts made in prior years.
Why This Is So Important
To understand why this is such a big deal, we only have to look at
history. From 1942 through 1976, the estate tax exemption was $60,000.
Then it began increasing yearly, reaching $600,000 in 1987. It stayed at
that level for 10 years. During the later part of the Clinton
administration, it was increased over 3 years to $675,000 and again
stalled, this time for 2 years. Then, in President George W. Bush’s
first term a series of increasing exemptions was enacted starting with
$1 million in 2002 and ending with $3.5 million in 2009, followed by
estate tax repeal for one year (2010) before reverting to $1 million in
2011. Most practitioners expected the Federal government to act to
prevent that one year of repeal, but it did not.
Then, on December 17, 2010, Congress and the President reached an
unexpected agreement and President Obama signed the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010,
otherwise known as “TRA 2010.” It was a mixed bag. The good news: It
provided an optional $5 million estate tax exemption for 2010 and a $5
million exemption for 2011 and 2012 that applied not just to estate
taxes but also to lifetime gifts and the generation-skipping transfer
tax. (The amount for 2012 was adjusted for inflation, resulting in the
current $5.12 million exemption.) The bad news: The deal was only for
two years. On January 1, 2013, the estate tax exemption will drop all
the way back to $1 million (unless the President, the House of
Representatives and the Senate all agree otherwise before then).
Here’s a table summarizing the history since 1987:
Year
|
Federal Estate Tax Exemption
|
Gift Tax Exemption
|
1987-1997
|
$600,000
|
$600,000
|
1998
|
$625,000
|
$625,000
|
1999
|
$650,000
|
$650,000
|
2000-2001
|
$675,000
|
$675,000
|
2002-2003
|
$1 million
|
$1 million
|
2004-2005
|
$1.5 million
|
$1 million
|
2006-2008
|
$2 million
|
$1 million
|
2009
|
$3.5 million
|
$1 million
|
2010
|
N/A (repealed) or $5,000,000
|
N/A (repealed) or $5,000,000
|
2011
|
$5 million
|
$5 million
|
2012
|
$5.12 million
|
$5.12 million
|
2013
|
$1 million*
|
$1.4 million*
|
* Current law, effective January 1, 2013
|
Are You Missing This Opportunity?
If you haven’t taken advantage of this exceptional opportunity, you are
not alone. Some people think the impending change doesn’t apply to them
because their estate is less than $5.12 million. (Wrong.) Others think
they can’t use the exemption unless they die in 2012. (Also wrong.)
Others have thought about it, but just haven’t gotten around to doing
anything about it, perhaps hoping that Washington, D.C. will do
something again like it did in 2010. Whatever the reason, unless you do
something before the end of the year, you could come to regret your
inaction.
Here, then, is another explanation of why it really is important for you to plan this year.
The Top Ten Reasons Why You Need to Plan Your Estate in 2012
1. In 2012, every American has a $5.12 million exemption; a married
couple can use both their exemptions and transfer up to $10.24 million
out of their estates.
2. You do not have to die in 2012 to
use your exemption. You can use it to make gifts now, while you are
living, including making a gift in trust to your spouse so it is out of
both estates.
3. You don’t have to use the full $5.12
million exemption to benefit. Those with $1 million to $5 million in
assets can save substantial amounts. Even those with less than $1
million should consider some planning to prevent future tax liability
and freeze, for gift and estate tax purposes, the value of those assets.
4. If you had already used all of your exemption before 2012, you now
have more that you can use this year. For example, if you previously
used a $3.5 million exemption in your planning, you have an additional
$1,620,000 you can use this year. Even if you used $5 million in 2011,
you have an additional $120,000 you can use this year. (Remember,
married couples can double the amount.)
5. You do not have
to make the transfers in cash or liquid assets, or completely give away
your assets. You can transfer illiquid assets like an interest in your
business or your home or other real estate to a trust. If you transfer
your home, you can continue to live there and take the tax deductions.
If you transfer an interest in your business, you can even do it in such
a way that you can keep control of the business. By planning now,
future appreciation of these assets will not be subject to estate tax,
and current depressed values may result in very favorable valuations.
6. You can leverage your exemption and make it worth much more by
using discounts and life insurance. Life insurance proceeds, when
structured properly, can be completely free of probate, and income, gift and estate taxes, and can be protected from beneficiaries’ creditors and predators, even divorce proceedings.
7. There are proven estate planning techniques available now
(including discounting, family limited partnerships, grantor trusts, and
others) that may soon be eliminated as Congress looks for more ways to
raise revenues. Coupled with the $5.12 million exemption and historic
low interest rates, for the next 2 1/2 months families can transfer significant assets at little or no tax.
8. The generation-skipping transfer tax (GSTT) exemption is also $5.12 million in 2012. The GSTT tax is in addition to
the federal estate tax and applies when you make a gift or leave an
inheritance to someone who is a generation younger than you are (37.5
years for non-descendants). In 2012, a married couple can use both their
GSTT exemptions to transfer up to $10.24 million tax-free to benefit
their grandchildren and future generations.
9. If you wait
just until January to plan, the amount you can give to your loved ones
(current and future generations) may be substantially lower than if you
act now. If the President, the Senate and the House of Representatives
do not all agree to change the law, not only will the exemptions be
lower in 2013, but the tax rates will also be higher, as shown in the
chart below.
Year
|
Federal Estate Tax Exemption
|
Top Estate Tax Rate
|
Federal Gift Tax Exemption
|
Top Gift Tax Rate
|
GSTT Exemption
|
GSTT Tax Rate
|
2012
|
$5.12 million
|
35%
|
$5.12 million
|
35%
|
$5.12 million
|
35%
|
2013
|
$1 million*
|
55%
|
$1.4 million*
|
55%
|
$1 million*
|
55%
|
* Current law, effective January 1, 2013
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10. If you have a substantial estate and use your entire $5.12
million exemption in 2012, unless the President, the Senate and the
House of Representatives all agree to change the law, it would be better
to give more this year and pay the gift tax at the current 35% rate
instead of paying it at 55% in 2013.
Planning Tip:
It will also cost you less to pay a gift tax now instead of paying an
estate tax after you die, even if the tax rate is the same. For example,
a taxable gift of $1.00 makes you liable for $.35 in gift tax for a
total of $1.35. But the same $1.35 in your estate taxed at 35% will net
just $.88 to your heirs.
How an Experienced Estate Planning Attorney Can Help
Most estate planning attorneys have counseled many families, and they
have seen the results of proper and improper planning. An experienced
estate planning attorney can guide you through the estate planning
process and will be able to bring in other experienced professionals as
their various areas of expertise are needed to help put your plan into
place.
You should never give away assets you might need, and
any kind of gifting program must be done under careful professional
guidance and supervision to be sure everything is done correctly. It is
also important to take full advantage of other tax-free gifting
opportunities before you start using your exemption.
Make Annual Tax-Free Gifts
Federal law currently lets you give up to $13,000 per year to as many
people as you wish without incurring a gift tax or generation-skipping
transfer tax.* A married couple can give twice this amount, or $26,000
per year per person. (These amounts are currently tied to inflation and
may increase to $14,000 and $28,000 for 2013.)
* Not all gifts in trust are entitled to either or both exemptions and estate planning attorneys knows those rules.
Over time, a great deal can be transferred through annual gifts. For
example, if you give $13,000 a year to five beneficiaries for five
years, you will have removed $325,000 from your estate for estate tax
purposes, not including any growth on these assets. The amount removed
from your estate is increased significantly with each additional $13,000
beneficiary or by spouses combining their annual exclusions.
When you give more than the annual tax-free amount, the excess will be
considered a taxable gift and will be applied to your federal gift and
estate tax exemption (currently $5.12 million). Remember, you can make
substantially bigger gifts this year with a higher exemption than you
can next year if the exemption is lower.
Make Unlimited Gifts to Charity and Pay Beneficiaries’ Medical Care and Tuition Expenses
You can also make unlimited tax-free gifts to charity and for medical
care and tuition expenses as long as payment is made directly to the
charitable organization, medical facility or educational institution.
The beneficiary does not have to be related to you.
Use Discounts and Advanced Planning Techniques
Your estate planning attorney can help you implement advanced planning
solutions that will best suit your goals and objectives, and make the
best use of the various wealth transfer techniques that are currently
available.
What We Can Expect in 2013
No one knows what will happen with the law in the future, but it is very likely that the gift tax
exemption will fall significantly, perhaps to $1 million even if a deal
is struck among the President, Senate and House of Representatives.
This is true even if the estate tax exemption stays the same or falls to a lesser number, like the $3.5 million proposed by the President’s budget.
Unless the Bush era tax cuts are extended, all
taxes (income, capital gain, dividend, estate, gift and
generation-skipping transfer taxes) are set to go higher on January 1,
2013. There will also be a new 3.8% surtax on certain investment income
and a 0.9% surtax on certain earned income that is part of the
Affordable Health Care Act.
Conclusion
The next 2 1/2 months really provide a unique estate planning
opportunity to transfer substantial assets--an opportunity that may be
gone on January 1, 2013. You owe it to yourself and to your family to
meet with us as soon as possible to find out how much you can save by implementing estate planning before the end of this year.
TEST YOUR KNOWLEDGE
1. For the rest of 2012, America has a $5.12 million lifetime federal
gift and generation-skipping transfer tax exemption. T F
2. Most people have already taken advantage of this opportunity. T F
3. A married couple can use both their exemptions and transfer up to
$10.24 million out of their estates if they do it before January 1, 2013. T F
4. You have to die in 2012 to use the $5.12 million exemption. T F
5. You have to use the full $5.12 million exemption to benefit. T F
6. If you used all of your exemption before 2012, you cannot use more this year. T F
7. To use the exemption while you are living, you have to make the transfers in
cash or liquid assets.
T F
8. By planning now, future appreciation of these assets will not be subject to estate
tax, and current depressed values can result in very favorable valuations. T F
9. In 2012, a married couple can use both their GSTT exemptions to transfer up to
$10.24 million tax free to benefit their grandchildren and future generations. T F
10. There are proven estate planning techniques available now that may soon be
eliminated as Congress looks for more ways to raise revenues. T F
Answers
True: 1, 3, 8, 9, 10
False: 2, 4, 5, 6, 7
To
comply with the U.S. Treasury regulations, we must inform you that (i)
any U.S. federal tax advice contained in this newsletter was not
intended or written to be used, and cannot be used, by any person for
the purpose of avoiding U.S. federal tax penalties that may be imposed
on such person and (ii) each taxpayer should seek advice from their tax
adviser based on the taxpayer's particular circumstances.
Waypoint Estate and Business Planning assists clients in the greater Chicago area including Lincolnshire, Mundelein, Vernon Hills, Lake Bluff, Grayslake, North Chicago, Lake Forest. Gurnee, Libertyville, Long Grove, Lake Zurich, Buffalo Grove, Northbrook, Deerfield, Glenview, Naperville, Wheaton, Yorkville, Algonquin, Huntley, Crystal Lake, Winnetka, Hawthorn Woods, Wilmette, Skokie, Wauconda and Wadsworth in Lake County, Cook County, DuPage County and McHenry County, Illinois.
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