Prepare for estate tax changes

By Chris Torchiana

There may be a short window to take advantage of high exemption levels and low rates.

If Congress doesn’t act before the end of the year, significant increases to estate and gift taxes are on the horizon. That’s because both federal estate and gift tax exemptions are set to revert to lower 2001 levels beginning Jan. 1, 2013, and estate tax rates are set to rise sharply. That means you may have only a short window of time to take advantage of the current higher exemptions and lower tax rates.

If  you’re single and have a taxable estate worth more than $1 million, or if you’re married with a taxable estate worth more than $2 million, you should be thinking about the implications sooner rather than later. We advise that clients be proactive and at least review their current estate plans – now. There is a fair amount of work and time involved with drafting a trust. Procrastinating could mean you run out of time to act before year end.

For 2012 both the estate tax and lifetime gift tax exemption are $5,120,000 per person and $10,240,000 per couple, with a 35 percent top tax rate. Beginning in 2013, however, unless further legislation is enacted, the exemptions will drop to $1 million per person ($2 million per couple) and have an effective top tax rate of 55 percent. That’s why it’s important to think about your estate and gifting strategies over the next few months, and to talk with your attorney about a plan that you can execute as the tax-law changes get closer. Future uncertainty should weigh into any decision you make.

What could that mean to you or your loved ones? Well, if your taxable estate is less than $1 million, probably not much. But above that the looming tax hikes could bite. For example, for a single person or married couple with a taxable estate of $3 million, the scheduled estate tax changes could mean a $945,000 federal estate tax bill next year, versus zero under current law.

Begin by reviewing the following questions before changing your estate plan.

  • What are my goals for my estate plan?
  • Am I in a position to use the time-sensitive strategies mentioned above?
  • What is the best type of trust for my personal needs and legacy wishes?
  • Can I afford to make a large gift?
  • Will I potentially need these funds at some point in the future?
  • Am I comfortable making an outright gift directly to my heirs, or do I prefer that the gift be made into an irrevocable trust?
  • Am I comfortable using part or all of my lifetime gift (and estate) tax exemption?
  • Am I concerned about my heirs being subject to creditor claims or divorce?
  • Do I live in a state that assesses a tax on gifts?
  • Do I own any assets that could dramatically increase in value?

Whether or not to take action now is a decision only you can make. Even if you decide not to make any changes now, it may still be a good idea to allow have your plan reviewed for completeness.

Chris Torchiana is the owner of Main Street Tax Advisory of Northern California, LLC, in El Dorado Hills. For more information visit taxplanningguy.com or call 1-888-856-6696.

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Posted by on Aug 31 2012.
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