Favorable Estate and Gift Tax Set to Expire End of 2012

April 4, 2012

By HunterMaclean Attorneys

Published in Business in Savannah

As we near the 2012 Presidential election and the expiration of the current estate and gift tax provisions signed into law by President Obama on December 17, 2010, there is a tremendous amount of uncertainty concerning which way the pendulum is going to swing.

Prior to the late ‘90s, the estate and gift tax was largely predictable, but in recent years the tax rate has flip-flopped between administrations, making it difficult to conduct long-term estate planning and predictable execution of traditional estate plans.

However, despite ambiguous political circumstances, it has never been more important than now for individuals and businesses to align themselves with experienced and qualified financial and estate planners who can effectively explore and utilize the tools available to minimize the impact of the impending estate and gift tax legislation changes on their business succession and their personal financial well being. Lack of foresight in relation to proper estate planning and wealth transfer can adversely affect a lifetime of financial gains that you or your business managed to create.

The estate and gift tax compromise, signed into law in 2010, included a $5 million gift and estate tax exemption per individual or $10 million for a married couple, without regard to the “deceased spousal unused exclusion amount.” Any assets exceeding that amount are taxed at a 35 percent rate. However, as of January 2012, the current $5 million gift and estate tax exemption has been indexed for inflation, increasing the exemption rate to $5.12 million per individual.

In addition, for gifts made after December 12, 2010, the lifetime exclusion limit unifies with the estate and gift tax rate at $5 million, as well as providing for portability, which eliminates the need to establish a marital-family trust to ensure that heirs receive the benefit of both spouse’s estate tax exemptions. It also allows aggregate gifts of up to $5 million per Donor during life without a current gift tax due.

As it is currently scheduled, the Tax Relief Act of 2010 that established the current estate and gift tax rates is set to expire on January 1, 2013. This means that unless Congress changes the law, the tax rate exemption will decrease from $5 million to $1 million and increase the top rate from 35 percent to 55 percent.

In President Obama’s Estate Tax Budget Proposal issued on February 14, 2011, his administration set forth revenue proposals for the fiscal year of 2012, including changes to the 2010 estate and gift tax compromise. The President is proposing that in 2013 the exemptions return to $3.5 million for the estate tax and $1 million of the gift tax, and a number something over $1 million for the generation-skipping tax (GST).

President Obama’s budget proposal is uncertain at best, given the difficulty and political resistance it is sure to face from Republicans. What is certain is that by the end of 2012, the nation will witness yet another political drama with regard to future exemptions, tax rates and even the existence of the estate tax.

Conditions have never been more favorable than now to make estate planning decisions. It is ill-advised to gamble your estate on the political volley currently underway. Financial and estate attorneys are experts when it comes to devising, strategic solutions that will work best for your estate. There are many types of trusts, LLCs, asset sales, insurance, promissory notes and other lifetime giving tools available that will help minimize your future estate tax liability.

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