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Act Now to Protect Against a Future Estate Tax Increase


What you can do now to protect yourself against any future estate tax increases.

The window for estate tax savings is closing. Unless Congress acts soon to change the law, estate and gift taxes will increase dramatically on Jan. 1, 2013. Those with savings, a small business, some real estate equity or a life insurance policy, should take advantage of the tax saving opportunities and planning options that expire this year.

Property subject to estate tax

The estate tax law imposes a federal tax on the value of property “owned” at death. The definition of the word “owned” is very broad and certainly includes everything directly owned by an individual.

Typically this category includes savings and brokerage accounts, the value of a residence or other real estate, ownership interests in a business and the proceeds of any life insurance policies.

The estate tax also applies to property considered indirectly owned, such as property intended as a gift but where too many strings were attached. For example, a transfer to a trust for children where the right to a portion of the income is retained would be enough to create an indirect level of ownership so that the full amount of the gift would be included and subject to tax.

The estate tax can’t be avoided by giving away some or all property as gifts during lifetime. That would be too easy. The gift tax is a separate but related tax that applies to lifetime gifts. Together with the estate tax, the system is more or less unified so that total transfers of property, above the specified exemption amount, may be hit very hard by a severe tax rate increase when the current law expires.

That all leads naturally to the question of what is the exemption rate for gift and estate taxes? How much of an estate might be subject to tax? And then, are there planning strategies that can be used to reduce the potential tax? Those are the key questions for the moment.

Increase in tax rates

The current exemption for both gifts and transfers at death is $5 million in total. Any portion of the exemption amount used during lifetime reduces the available exemption amount for estate taxes. If an individual with a $10 million estate makes a $5 million gift during lifetime, then that reduces the available exemption amount to zero. As a result, the balance left in the estate on death is $5 million and under current law the tax is imposed at a 35% rate. A married couple has a combined exemption of $10 million.

But as I stated above, the exemption amount is scheduled to change starting on Jan. 1, 2013. The Bush tax cuts were slated to expire in 2010, with income and estate tax rates reverting to the pre-tax-cut level. That amount for gifts and estate taxes was $1 million.

Just before expiration in 2010, the president and Congress approved a two-year extension of the law and the current $5 million exemption was negotiated as part of the package. Under the law as it stands now, the estate tax exemption and the gift tax exemption will both drop to $1 million and the top rate will increase from 35% to 55% when the extension expires.

Whether Congress will reach an agreement about extending the current law can’t be predicted. President Obama has reiterated his position that he will not agree to extend the tax cuts for couples making over $250,000 per year. The Republicans in Congress have stated that they will not agree to any legislation that increases tax rates.

These two positions are irreconcilable so it’s difficult to imagine the grounds for compromise. Perhaps there will be a last-minute, temporary extension, but whether a deal is reached at all and what that deal might look like is certainly unknown at this point.

Planning strategies

With the risk that the current gift and estate tax exemptions of $5 million will expire shortly, or at least be significantly reduced in a compromise, many experts recommend clients take advantage of the temporarily high exemption rate

now and

move assets out of their estates to save significant future taxes.

For example, those who own investment properties with a reduced current value, but a potential for future appreciation, might consider moving the property into a trust for the benefit of children or grandchildren. This would be a sound strategy if the estate tax exemption is reduced and the value of the estate might exceed the exemption amount at some point in the future.

The combination of historically low interest rates and depressed property values creates many opportunities for transfers in trust or through various entities, which may produce an ultimate saving of 55% of the future value of each transferred asset.

Although the administration has a number of pending proposals to reduce the effectiveness of existing tax strategies that take advantage of current law, there is an unusual and significant window of opportunity available now to create permanent tax protection and insulation from estate tax risk, regardless of the ultimate course taken or not taken by Congress and the administration at any time in the future.

, is an attorney and the author of the book

. To receive a complimentary copy of the book visit www.rjmintz.com.

Asset Protection for Physicians and High-Risk Business Owners

Robert J. Mintz, JD, LLM

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