Now that Election Day is behind us, it is time to get back to the working toward resolving the real issues of our times. All of the incumbents, whether re-elected or not, have a major task facing them before they end their terms in January: avoiding sequestration and the fiscal cliff. Additionally, as California’s ballot initiatives meet their fates, this may be your last opportunity to engage in some personal income, gift, and estate tax planning .
In 2011, the federal Congress created “sequestration” as part of its debt ceiling and budget debate wherein a series of automatic cuts would take effect January 1, 2013 if Congress did not take action. It is worth noting that, although half of the proposed cuts are to be directed at defense spending, the Obama administration has explicitly exempted Veteran’s benefits from the cuts. This means that veterans receiving VA Aid & Attendance Non-Service Connected Disability Pension or other aid from the VA, including education, retraining, job, and housing assistance should not be affected by the pending cuts.
Similarly, a number of tax provisions are set to expire at the end of the year. The payroll tax deduction, which provided a tax break to all working individuals, will expire. Additionally, tax rates will increase on both ordinary income and capital gains. Depending on the final outcome of the California ballot initiatives once the vote is certified, there could be personal income tax rate increases at the state level as well. Finally, estate taxes are set to increase dramatically when the estate tax exemption returns to $1 million on January 1. (Take a look at how to “lock in” the current $5 million exemption.)
Rarely are so many tax increases converging simultaneously in such a dramatic fashion. Time is running out to work with your financial advisors to develop your financial plan! If you have not already done so, you should schedule an appointment with your estate planning attorney and tax advisor. In consultation with each other, your advisors can help you determine your long-term financial outlook and whether you ought to make any year-end gifts, sell stock in order to take advantage of lower capital gains rates, or modify your trust. Depending on your age, you may also want to keep track of highly appreciated stock for which you intend to receive a basis “step up.”
It is always important to regularly review your estate plan. Looking it over annually to ensure that it still reflects your preferences for health care, who will make over your financial affairs and decisions, and who will inherit your estate ensures that your wishes will be carried out even after you can no longer make them known. However, these next two years are especially important given the tumultuous nature of the recent laws. In the last 5 years, we have seen the estate tax exemption fluctuate from $3.5 million in 2009 to a complete repeal in 2010, then $5 million the last two years, and now $1 million next year. If your estate plan was drafted during this time, it may be more conservative or more aggressive than is necessary for your situation.
Estate Planning: The Price of Organization, Rewards, Gifts, and Wondrous Tax Things… FREE REPORT: This complimentary report, focused on Estate Planning, is comprised of many of Mr. Miller’s articles from his long running column for the largest regional newspaper in San Diego County. This report will guide you through the questions surrounding getting your estate planning in order.