With the fiscal cliff finally upon us, it is time to review and renew your estate plan. For the last decade, estate taxes have been a limited factor in estate plans for the vast majority of families. With applicable exclusion amounts increasing steadily, fewer and fewer families were likely to be faced with the possibility of estate tax liability. However, beginning January 1, 2013, the estate tax exclusion amount returns to $1 million (currently $5.12 million) and the highest estate tax rate returns to 55% (currently 35%). Fortunately, this is largely a tax on those who are not paying attention. Depending on your particular financial circumstances, there are certain actions you can take right now that will avoid all or substantially all of this tax increase.
Restate Your Trust
If you are married and have a simple family trust, you could consider restating the trust as a Disclaimer Trust or an A-B Trust. By doing so, you effectively double the amount of money you and your spouse may pass estate tax free. Remember that the concept of “portability,” which allowed a surviving spouse to use both applicable exclusion amounts, may expire as well. Without proper advance planning, both spouses may not be able to maximize their estate tax exemptions, which could result in significantly more estate taxes due! By restating your trust, you do not need to retitle all your assets in order to significantly alter your plan.
Plan Your “Step-Up”
Many assets receive a “step up” in basis upon death, which often reduces the income taxes due when certain assets are sold. The balancing and calculations involved can be complicated and should not be undertaken alone. However, you may be able to achieve significant savings for yourself and your heirs by collaborating with your estate planning attorney and tax advisor to determine how to title, hold, and sell your assets.
Consider Life Insurance
Life Insurance can be a valuable way to provide for the payment of estate taxes that will be due. However, life insurance is also subject to estate tax! With careful planning and the right policy, you may be able to structure your plan to eliminate the estate taxes due on proceeds from life insurance and provide some financial security to your heirs.
Consider Charitable Beneficiaries
In cases where your estate plan has already necessarily done a significant amount of estate tax planning, but some estate taxes are still likely to be due, consider leaving some of your estate to charity. Charitable organizations receive bequests tax free and, when certain qualifications are met, no estate tax is due on the bequest. If your family heirs are only going to receive 45% on the dollar while the IRS is the main beneficiary, maybe an organization you support would be a better use of funds.
Estate planning is a process and your documents should be reviewed regularly in order to ensure that they are still working for you and your family’s needs. Now is the perfect time to determine whether any changes ought to be made in light of the highest tax rates we have seen in years!
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