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New Stability and Opportunities for Estate Planning

January 2, 2013.  As widely publicized, the President signed a new law that leaves high income tax rates on the wealthy (now defined as those with taxable incomes over $450,000 for married couples and $400,000 for singles – roughly the top 1%).

However, less publicized features of the new law help many more Americans:

• The federal estate and gift tax exemption has been preserved at $5 million (indexed for inflation). Although the federal estate tax for larger estates has increased to 40% (up from 35%), preserving the exemption at $5 million instead of allowing the exemption to drop to $1 million (as it was scheduled to do) helps keep many Americans from paying estate tax. Life insurance death benefits, alone, would have caused many to have an estate tax problem.

• The new law permanently makes “portability” part of the law, so that a surviving spouse can take advantage of the unused portion of the deceased spouse’s $5 million exemption from estate and gift tax. While portability helps those who fail to plan, often estate planning reduces taxes even more.

• The new law makes no provisions for reducing or eliminating valuation discounts, GRATs, and other estate planning methods. For now, those doors remain open, although they may be shut in the future. This may be the smartest time yet to do some gift planning because:

• top earners will now be paying over 43% in taxes on their investment income, while those they may gift to are in lower brackets;
• the gift and estate tax exemption is higher than ever ($5.25 million per person, after adjustment for inflation);
• asset values are low, but appear to be ready to rise; and
• interest rates are at all-time lows.

These circumstances create excellent opportunities to avoid or reduce income, gift, and estate taxes all at the same time. This applies even to those who have previously exhausted their gift tax exemption and to those who want to reduce their exposure to creditors.

A key point is that, unlike the last 12 years, these changes are not temporary. Given the stability that Congress has provided, now is a good time to revisit your existing estate plans, either to ensure they still meet your needs or to take advantage of the current laws.  Do not hesitate to call Bruce Gaynes, Joel Arogeti, or Richard Bennett with any questions or if we can help.