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Estate Planning 2012 - The Window is Closing

Estate Planning Opportunities for 2012. Most of you have heard that 2012 offers unique estate planning opportunities under the federal estate and gift tax laws. However, the current laws are due to expire at the end of 2012. If Congress and the President do not take action to extend the current estate, gift and generation-skipping transfer (“GST”) tax laws, then as of January 1, 2013, we will return to the much harsher wealth transfer tax system that we faced in 2001. You may hear speculation as to what may occur, including the possibility of a retroactive law in 2013, but the honest answer is that no one knows what will happen.

The following chart compares the estate, gift, and GST tax rates and exemptions for 2012 and 2013:

2012 2013
Max. Estate Tax Rate 35% 55%
Max. Gift Tax Rate 35% 55%
GST Tax Rate 35% 55%
Est. Tax Exemption $5,120,000 $1,000,000
Gift Tax Exemption $5,120,000 $1,000,000
GST Tax Exemption $5,120,000 $1,400,000 (est.)

As shown in the above chart, the ability to make large gifts within the current exemption amounts is scheduled to end after December 31, 2012.

Plan your gifts in an orderly manner. Making gifts of this magnitude should not be a last minute action. It requires a good deal of time to:

  • Analyze the financial implications of your gift (i.e., whether the gift makes sense from an economic/tax standpoint after taking into account various factors such as the expected post-gift appreciation, the income tax basis, and your needs);

  • Plan and implement the logistics (e.g., outright gift vs. gift in trust; qualified appraisals for gifts of interests in closely-held businesses); and
  • Take your own “gut check” – your comfort level with making the gift, even if it makes sense tax-wise.

Do not assume that the 2012 planning opportunities may not apply to you. Here is just one example of why it would be a mistake to think that the 2012 opportunities may not apply to you: You are willing to make a large gift to your children, but you want your spouse to continue to receive the income from the gifted assets. Thus, you assume that you are precluded from using all or a part of your $5,120,000 exemption now. Your assumption would be incorrect. You can use your gift tax exemption in connection with a gift to a trust, which can be held for the benefit of your spouse (and descendants, if you wish) for the rest of your spouse’s life before passing to your children. The trust can be set up in a way that keeps the assets out of your and your spouse’s estates.

Get the process started now! We suggest that you contact us to review these matters to see what opportunities are available and what is appropriate for you.

Reminder – Beneficiary Designations

People often overlook the importance of keeping their beneficiary designation forms up to date. These forms apply to assets such as retirement accounts (e.g., IRA, 401k), annuities, and life insurance policies not owned by and payable to an irrevocable life insurance trust. Remember that your Will only controls assets that you own in your individual name or that are designated as payable to your estate or a trust under your Will. The beneficiary designation form prevails over the provisions of your Will.

It is possible that your current beneficiary designations may distribute the related assets in a way that is not at all in accord with your latest wishes as expressed in your Will. For example, (1) you may now be divorced and your prior spouse may still be named as your beneficiary, (2) you may want your children to receive your estate in trust and not outright, and/or (3) your investment advisor may have gone through a merger and the old forms cannot be found. Additionally, the Treasury Regulations provide complex rules concerning beneficiary designations; not addressing these rules can have adverse consequences.

This brief Bulletin does not attempt to discuss all of the nuances regarding beneficiary designations. The key point is that you should obtain copies of your current designations to see if they reflect your wishes. We are very glad to review those designations with you in the context of your overall estate planning.

If you have any questions about these matters, please contact your regular Gordon Feinblatt attorney, or any of our lawyers in the Trusts & Estates Group.