Tags: estate taxes | inheritance tax | trusts

Time is Running Out On the $5 Million Estate Tax Exemption

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Monday, 28 Mar 2011 07:44 AM Current | Bio | Archive

There is a window of opportunity until the end of 2012 to put the $5 million exemption from estate and gift tax to maximum use. As a result, many with current estate plans — and those that have not put one together yet — are rushing to take advantage of an ability to pass on a large amount of money free of otherwise onerous tax.

As part of the horse-trading that went on as part of the tax compromise last year, Congress allowed for the next two years an exemption from estate, gift, and generation-skipping transfer tax of $5 million. In 2013, the exemption is scheduled to revert to $1 million although the President's budget proposal for 2013 is for a $3.5 million exemption and increasing the top tax rate from the current 35% to 45%. 

A lot of money out of the taxpayer's estate is on the line.

Most estate plans for married couples now contain special formula clauses that were designed to maximize then-existing federal estate tax exemption. A formula clause was used rather than a dollar amount to more effectively balance the distribution of the estate.

Basically this divided the estate between what is known as the "credit-shelter" trust, which uses the amount allowed as the tax exemption, and the "marital trust" which got the rest of the estate. As a result, there was no tax on the first to die. Then the credit shelter trust, usually set aside for the children, could thereafter avoid tax in the remaining spouse’s estate. It was the commonly used standard structure for most estate plans.

This has changed because for a great many estates, the formula clause would result in the children's trust getting overfunded and the remaining spouse being left too little. As a consequence, all-existing estate plans need to be reviewed to see if any amendments are needed.

Not to be overlooked is the complexity that is added by state taxes. The impact of state inheritance tax can be significant. With assets of an estate being able to be taxed by the state separate from the federal tax, this could be a costly oversight. Some states, like Illinois, are considering reinstituting an inheritance tax while others, that have been known as "no tax" states, have been also considering changes that could result in an estate being taxed.

For those with larger estates, the $5 million exemption represents an opportunity to fund larger irrevocable life insurance trusts and such structures as a dynasty trust. Up to now, funding the premium of the cost of life insurance without incurring gift tax has been a major problem. With a husband and wife, for example, up to $10 million could be used tax free, resulting in a very large insurance trust.

Dynasty trusts are powerful tools for larger estates for the many benefits that can be obtained. Essentially, they allow considerable flexibility and yet offer a way of transferring wealth from one generation to multiple future generations. When structured properly, a dynasty trust provides a method to protect assets from creditors for the first generation and for the future beneficiaries.

It's tough to predict what will happen beyond 2012. Politics seems to me to be the key driver when it comes to tax. This new law will expire for sure in 2012. Those who are smart will plan their estates to take advantage of the existing $5 million exemption and be able to pass on even a greater part, if not all, of their lifetime of hard work and energy to their families free of tax.

 

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Kleinfeld
There is a window of opportunity until the end of 2012 to put the $5 million exemption from estate and gift tax to maximum use. As a result, many with current estate plans and those that have not put one together yet are rushing to take advantage of an ability to pass...
estate taxes,inheritance tax,trusts
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2011-44-28
Monday, 28 Mar 2011 07:44 AM
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