As you all know by now, the American Relief Act of 2012 has been passed and the “fiscal cliff” avoided. The act extends and makes permanent many of the Bush era tax cuts. Relating specifically to estate and gift taxes, the exemption for estate and gift tax remains unified at 5 million dollars. Index for inflation, the 2013 exemption is $5,250,000.00 per individual and $10.5 million for a married couple. The Act retained the concept for “portability” so that a surviving spouse can use a deceased spouse’s unused exemption provided that an estate tax return is filed and the portability election is made. Proposals to curtail planning techniques commonly used by high net worth families were not passed. Thus, short term grantor annuity trust (GRATS), sales to intentionally defective grantor trusts and valuation discounts for family partnerships and LLCs are still available to achieve gift tax savings. That’s all the good news, the bad news is the maximum tax rate was increased to 40%.
For now (Congress can always change this in the future), the Federal estate tax is now irrelevant for most individuals. Some of the basic concepts of estate planning will now change and the planning that most have done should to be evaluated and perhaps changed. The new paradigm of estate planning will no longer focus on estate taxes. The focus will now be on such matters as asset and divorce protection, minimizing state estate taxes, income tax avoidance planning, new uses for life insurance and life insurance trusts, new uses for family partnerships and LLCs and long term care and longevity planning.
Because the new estate planning regime will not need to focus so much on estate tax avoidance planning can now be simplified. No longer may be necessary for a married couple to divide their assets and maintain two separate trusts. Rather, subscribing to the KISS theory (keep it simple stupid) a single joint trust to avoid probate may suffice.
In conclusion, the new law will provide you with simpler and less costly planning options. Many may want to review their plan in light of this new planning paradigm.