Estate Planning Update – Time is Running Out

On January 1, 2011, Congress rewarded good tax planners by increasing the individual estate, gift, and generation-skipping transfer (“GST”) tax exemption amounts, and included a tax rate of only 35% for any estates or gifts that exceeded the increased exemptions. Since the legislation became effective, the individual exemption amount has been $5,120,000. That means if at the time you pass away, your “estate” is worth less than that amount, your estate will not be taxed on the Federal level (the State of Ohio tax exemptions are significantly lower, but will be repealed on January 1, 2013 – i.e. no Ohio Estate Tax for those who pass in 2013). Alternatively, you may give away gifts in an amount up to the Federal limit without incurring any Federal tax (yes, you can be taxed for giving property away). The tax rate comes into play once the value of your estate (and gifts) exceeds $5,120,000. Ultimately, this legislation permitted individuals to pass along significant gifts and engage in creative estate planning while simultaneously taking advantage of a low tax rate. However, all that may change on January 1, 2013.

Unless Congress acts to extend the legislation, it will expire on December 31, 2012, and the exemptions and tax rate will reset to $1,000,000 and 55% respectively. While $1,000,000 may seem a high threshold, if your estate consists of your home, some vehicles, and a retirement account, that threshold can be easily breached. Additionally, the exemption is a “unified” exemption – that means it takes into account the value of gifts you have given away and the value of your estate, and if combined those values exceed $1,000,000, the 55% tax rate is triggered. Obviously, the reduced exemption in combination with the significantly higher tax rate can have devastating effects on your ability to preserve and pass along your assets to family and loved ones.

Perhaps your “glass-half-full” outlook has convinced you to believe that Congress will step in at the last moment to preserve the historical legislation that currently exists. That’s cute. The current consensus is that IF Congress does create new legislation that it will not be as generous as that in place now. For those looking to hedge, if the current exemptions and tax rate are extended it still makes sense to take advantage of them now to capture the appreciation most assets experience (unless you own real estate in Southern California).

There are a variety of tools that can be utilized to plan appropriately for the sunset of the current legislation. Don’t wait until December 30^th to contact your Estate-Planning or Tax Attorney (shameless plug – I can be contacted at (614) 759-4603 or at  http://thehelawfirm.com/contact-us/) and implement a strategy to take advantage of the current estate-planning opportunities. It is critical that you take the necessary steps to ensure your legacy is passed along to those you love, and the current legislation allows you to do so in an unprecedented manner. The future legislation may not be so accommodating.