By Brian G. Quinn
It’s November 2012. Are you doing your year end planning? Many of my clients are. Estate taxes is a topic that keeps coming up time and time again. Did you know that estate taxes are scheduled to go up drastically in 2013?
Will Your Estate Taxes Increase?
Here’s an example; If you have a $1.3 million estate today you would not be subject to an estate tax. Proper planning will help you completely avoid estate taxes. However, if nothing is done by January 1, 2013, your estate could be subject to $165,000 in federal taxes at your death. How can this tax be avoided? With tax rates on estates over $1 million set to be taxed at 55% in 2013, there are great gifting and planning opportunities that need to be taken advantage of in 2012.
What Does the Estate Tax Look Like in 2012?
Under current law, the federal estate tax exemption is $5,120,000. That means that anyone who passes away can exempt $5.12 million of property from estate taxes. Any property over that $5.12 million threshold is taxed at 35%. Current law also allows someone to make gifts during their lifetime of up to $5.12 million in property without being subject to gift taxes.
What Will Happen With Estate Taxes in 2013?
In some ways we have some direction as to what will happen to estate taxes in 2013 and beyond, but in some ways the answer to this question is very much up in the air. Without any additional action from Congress and the President, the exemption is scheduled to fall to $1,000,000 with any amounts over $1 million being taxed at 55%. The gift tax exemption is also scheduled to drop from $5.12 million to $1 million. What the increase in taxes means for someone passing away in 2013 with a $ 5 million estate is that their estate could be subject to $2.2 million in taxes. That same $5 million estate would incur no taxes in 2012. That’s a pretty drastic change in tax liabilities. Luckily, there is planning that can be done for a fraction of this cost today to avoid this situation.
What Can Be Done Now to Avoid Estate Tax Expenses?
Since we have such a high threshold for gifts, clients who want to take advantage of the ability to gift property out of their estate up to $5.12 million gift tax free should do so immediately. As with any gifting program, consult an estate planning attorney, as well as financial and tax professionals before gifting property to another person. This will allow someone to give a legacy now to their beneficiaries, while at the same time reducing their estate tax liability in the future.
Another option we have is life insurance to pay estate tax liabilities. If someone knows they need to plan for a tax liability at their death, it is a good idea to have a life insurance policy that can pay those taxes. But the problem with simply owning a life insurance policy that will pay out in the event of your death is that the proceeds of that policy could be considered part of your estate if not structured properly. By creating the right type of trust, such as an Irrevocable Life Insurance Trust or ILIT, we can have a policy owned by a trust outside of your estate, with the ability to pay estate taxes for you. This creates liquidity in the event of an estate tax issue, or additional inheritance for your beneficiaries if the estate tax threshold goes up.
Planning Ahead is Critical
We may not know what the future of the estate tax may hold, but we know what the future is scheduled to hold. With more taxes on the horizon, the time to plan is now. By getting together with a team of trusted estate, tax, and financial advisors, you can plan to ensure a good quality of life and legacy for you and your family. Please contact us today for a free consultation.
Written by Brian G. Quinn, Attorney with Quinn Estate & Elder Law