For more than a decade, we have lived with great uncertainty about the future of our federal gift, estate, and generation skipping transfer tax laws. The amount of wealth that could be transferred tax-free increased, and the tax rate on the excess decreased, almost every year since 2001...with a couple of hiccups. At the end of 2010, and again at the end of 2012, we faced the unsettling prospect of reverting to the much stingier exclusion amount and higher tax rate that were in effect in 2001. Intelligent, long-term planning has been an elusive, frustrating challenge.
On January 1, 2013, Congress enacted the American Taxpayer Relief Act of 2012 (ATRA). Now, each of us has a basic exclusion amount of $5M (indexed annually for inflation - thus, $5.25M in 2013); and we are subject to a tax rate of 40% on transfers of wealth in excess of our applicable exclusion amount. Significantly, the basic exclusion amount and the transfer tax rate are "permanent" now - i.e., they are no longer scheduled to "sunset," as they were continuously from 2001-2012. "Portability" of the Deceased Spouse's Unused Exclusion Amount is now a permanent provision of our transfer tax system, as well. Finally, we can plan our estates without constantly worrying about temporary tax laws that may or may not expire soon, right?
"[I]t's time for lawyers to stop reading the tea leaves, put aside aggressive tax moves and get back to the real estate planning crisis, which isn't about taxes. Nearly 2.5 million Americans die each year, and many haven't signed the basic documents needed to protect loved ones. A 2011 Associated Press survey found 64% of baby boomers didn't even have a living will."
If you have created your own estate plan already, probably it should be reviewed and reconsidered in light of the recent, significant changes to our federal transfer tax laws. What made sense for your family when the exclusion amount was much lower may not make sense for them today.
If you have not created you own estate plan yet, I encourage you to make it a priority now. Without a comprehensive plan, your estate may be subject to probate and intestate succession, both of which could have very undesirable consequences. You will sacrifice the opportunity to provide for ongoing management of valuable assets for beneficiaries who are incapable of managing them on their own behalf. If you become permanently incapacitated, a conservatorship may need to be established for you, which will be a painful experience for your family that will continue to weigh on them for as long as you remain subject to court supervision.
Effective, comprehensive estate planning is about so much more than mitigating taxes and avoiding probate. Fundamentally, it is about using your best efforts now to insure that your wishes, regarding both your financial and personal matters, will be respected when you are no longer capable of expressing them yourself.
Please contact me at 323.654.9513 or firstname.lastname@example.org to discuss any aspect of your current estate plan.
Brooks Paley, J.D., LL.M.
Attorney at Law