What we have for the next few months is, indeed, an historic opportunity in estate planning, one we have never had before and likely will never see again.
You may remember that, at the end of 2010, Congress put in place a two-year estate tax provision, probably with the assumption that two years would give it time to do something more permanent. In this provision was a huge gift that 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. You can use it 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.
- This exemption is per person, so a married couple can give twice this amount, or up to $10.24 million.
- Under current tax law, the $5.12 million exemption we have in 2012 will decrease to just $1 million on January 1, 2013. In addition, the top tax rate will increase from 35% in 2012 to 55% in 2013. This means that if your estate is over $1 million and you don’t plan now, more of your estate will go to pay estate taxes if you die in 2013 or later, leaving less for your loved ones.
- The generation-skipping transfer (GST) tax exemption is another reason to plan this year. This tax applies when you transfer assets (by gift or inheritance) to a grandchild, great-grandchild or other person more than 37.5 years younger than you. It 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 lets you leave considerably more to grandchildren and future generations without paying this tax—or gift or estate taxes.
- Current law also has income tax rates increasing in 2013.
- In 2012, we have options that estate planners have come to rely upon as “standards.” For example, currently you can make gifts using life insurance, various trusts, family limited partnerships and others—often using discounted values that make your exemption go even further--and still keep control. But these may soon be history as lawmakers search for more ways to generate revenue and close perceived loopholes.
- Lastly, interest rates 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 we only have to look at recent history to see how likely that may be. Starting in 2001, Congress increased the amount exempt from estate and gift taxes, from $675,000 in 2001 to $3.5 million in 2009. The intent was to give Congress time to reform these tax laws. A “stick” to motivate them was included: if Congress did not act, there would be no estate tax in 2010. Congress did not act in time, so in 2010, for one year, there was no estate tax. As a result, there were some very wealthy people who died that year (including George Steinbrenner, owner of the New York Yankees) whose estates paid no estate tax.
Keep in mind that even if Congress does change the law, we have no idea what the new law will look like. And it’s best to plan based on what we know—not on what we think might happen.
Those who have sizeable resources, and their families, stand to benefit the most from the $5.12 million exemptions. But, remember, those with net estates of more than $1 million can also benefit.
This once in a lifetime opportunity is about to expire. You don’t want to miss it.