A green light from Congress to plan your estate
Matthew Laurel Trinidad
Glenwood Springs, Colorado CO
If you haven’t done so recently, now is a great time to do some estate planning.
For at least the last several years, estate planners have been encouraging and implementing all sorts of esoteric and costly strategies to deal with uncertainties related to the estate and gift tax components of the so-called “fiscal cliff.”
Had we gone over the cliff, the estate and gift tax rates would have reverted to Bush-era levels. The basic exclusion, which exempts a certain amount of property from the estate tax, would have fallen to $1 million and rates would have skyrocketed to 55 percent.
The American Taxpayer Relief Act of 2012 (ATRA), which averted the cliff, addressed these uncertainties, and prevented these large increases in gift and estate taxes from automatically taking effect.
The good news begins with a large exclusion, which the ATRA sets at $5.25 million, which is indexed to inflation. Married couples can effectively combine their exclusions to transfer $10.5 million tax free.
Prior to the ATRA, bypass “credit shelter” trusts were necessary to ensure that the exclusion of the first spouse to die would not be wasted. The ATRA makes permanent the relatively new concept of “portability,” which permits the exclusion of the first spouse to die to be transferred to the surviving spouse. While bypass trusts have many non-tax related benefits in some circumstances, they may be unnecessary from a tax perspective.
The ATRA raises gift and estate tax rates from 35 percent to 40 percent. The new rate is substantially lower than the 55 percent rate that could have been in effect without the new law, so very large estate holders might consider breathing a sigh of relief on this one.
The laws enacted under the ATRA are permanent, at least in the sense that there is no automatic reversion to more burdensome tax laws. Congress would have to grab hold of what has become a third rail in American politics and vote to raise these taxes, which is not likely anytime soon.
Finally, the ATRA doesn’t touch GRATs, IDGT’s, Crummy powers, valuation discounts, and many other popular tools designed to minimize potential estate tax liability for particularly wealthy households. Large estate holders can and should consider employing these strategies. They may not be around forever.
In light of the new laws, you might be wondering if you need to update your will.
Of course, it’s impossible to answer that question without a review of the documents, but you might take some comfort in the fact that the ATRA basically perpetuates the temporary laws that were in place in 2012.
Most estate planning specialists considered this outcome a possibility when preparing documents for their clients over the last few years, so if you got your will done recently, you’re probably OK.
However, at the risk of getting a little technical, some credit sheltering estate plans might rely on a “formula funding” mechanism. Given the very large basic exclusion amount, formula funding may result in some seriously unintended consequences. So if you’re a married, high net worth householder with an old will, now’s the time to at least have an estate planning specialist take a look at it.
For the rest of us, many of the uncertainties potentially affecting estate planning from a federal tax perspective are resolved, it probably won’t get much better than this, so now is a good time to plan for that other inevitable in life.
Matthew Laurel Trinidad is a transactional attorney at Karp Neu Hanlon PC in Glenwood Springs. His practice emphasizes estate planning and probate. Contact him at firstname.lastname@example.org, 945-2261, or visit http://www.mountainlawfirm.com.
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