Tick, Tock on Estate Planning Opportunity

One of life’s certainties -- taxes -- is a little less certain in 2012. It’s increasingly unlikely Congress will address the expiring Bush tax cuts before the November elections. Instead, the debate will be left to a lame-duck Congress, or even pushed into 2013. That’s not great timing for tax planning.

As investors focus on whether to accelerate portfolio gains due to scheduled increases to income and capital taxes, they may be overlooking a small window of opportunity in the estate planning arena. If Congress fails to act before the end of the year, today’s high gift tax exemption levels and low estate tax rates will expire on January 1, 2013. And when the federal gift tax exemption and estate tax revert to 2001 levels, the change will be significant.

For 2012, both the estate tax and lifetime gift tax exemption are $5,120,000 per person and $10,240,000 per couple, with a 35% top tax rate. Beginning in 2013, however, unless new legislation is enacted, the exemptions will drop to $1 million per person ($2 million per couple) and the top tax rate will increase to 55%.

If you're single and have a taxable estate worth more than $1 million, or if you're married with a taxable estate worth more than $2 million, now’s the time to think about the implications of these new taxes on your estate. Making immediate outright gifts is probably the easiest way to get money out of your estate in advance of these changes, but you might also talk with your attorney about a grantor retained annuity trust (GRAT), a qualified personal residence trust (QPRT), or gifting into an irrevocable trust.

Remember, in order to use the higher exemption, your gifts must be completed by December 31, 2012. It is important to note, too, that as the market continues to recover, it may be that getting all future appreciation of the gifted assets out of your estate may be an additional benefit of this strategy. While it’s impossible to predict how a new Congress will deal with estate tax reform (Remember when they let the estate tax expire all together in 2010?), this is a valuable estate planning opportunity that is available today.