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The Clock is Ticking on 2012 Planning Opportunties

Posted on: August 25th, 2012
There has been a lot of media coverage about the Bush tax cuts that are set to expire on December 31, 2012 and whether they will be extended for all taxpayers or if they will be discontinued for top earners. But not nearly as much has been said about the current estate and gift tax rates that are also due to expire on December 31.

What we have for the next few months is an historic opportunity in estate planning. At the end of 2010, Congress put in place a two-year estate tax provision that included a huge gift no one had been expecting: a $5 million gift and estate tax exemption, the highest it has ever been. It was indexed for inflation for 2012, making it even higher ($5.12 million) but for this year only.

Not nearly enough people have taken advantage of this. Some think it doesn't apply to them because their net estate is less than $5.12 million, and others think they can't use it because they don't plan to die in 2012. But they are mistaken, and are likely missing the chance of a lifetime when it comes to estate planning. Here's why 2012 is such an incredible year for estate planning.
  • This is a combined gift and estate tax exemption, so you don't have to die in 2012 to use it. It can be used to make gifts in 2012 and still exclude up to $5.12 million from estate taxes when you die, regardless of the amount of the estate tax exemption at that time. The exemption is per person, so a married couple can give twice this amount, or up to $10.24 million.
  • Under current law, this $5.12 million exemption will decrease to just $1 million on January 1, 2013 and the top tax rate will increase from 35% in 2012 to 55% in 2013. Those with estates over $1 million who do not plan now and who die in 2013 (and quite possibly in later years) will pay considerably more in estate taxes'and leave that much less to loved ones.
  • The generation skipping transfer (GST) tax exemption is another reason to plan this year. This tax applies when assets are transferred (by gift or inheritance) to a grandchild, great-grandchild or other person more than 37.5 years younger than the person making the transfer. The GST tax is equal to the highest federal estate tax rate in effect at the time and is in addition to the federal estate tax. In 2012 the exemption for the GST tax is also $5.12 million ($10.24 million for married couples) and the tax rate is 35%. Next year, the exemption will be about $1.4 million and the top tax rate will be 55%. Planning now allows considerably more to be given to grandchildren and future generations without incurring this onerous tax.
  • In 2012, estate planners have options that are considered 'standards.' For example, gifts can be made using life insurance, various trusts, family limited partnerships and others, often using discounted values that leverage exemptions, without losing control. But these may soon be history as lawmakers search for more ways to generate revenue and close perceived loopholes.
  •  Lastly, interest rates (bound to increase in 2013) are at historic lows and thus there has never been a better time to do intra-family loans and other interest-rate-sensitive planning.
Of course, Congress could change the laws before January 1 but, based on recent history, that seem unlikely. Even if Congress does change the laws, we have no idea what the new ones will be. It's best to plan based on what we know'not on what we think might happen. This once-in-a-lifetime opportunity is about to expire. You don't want to miss it.

UPDATE: As of 2014, the federal estate tax exemption is $5.34M.
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