Estate Tax and “Fiscal Cliff” update – November 2012

Death and taxes may be life’s two great certainties. But thanks to the upcoming elections and the looming “fiscal cliff,” the relationship between the two is getting increasingly cloudy for affluent families—and making estate planning a challenge.

What we do know is this: if Congress doesn’t act by the end of the year, the exemption on the estate and gift tax for individuals will drop from $5.1 million to $1 million. (This is a tax on the transfer of assets between non-spouses. It’s known as the gift tax when the giver is alive and the estate tax, or “death tax,” after the giver passes away; both count toward the taxpayer’s lifetime exemption.)
The decline to $1 million would cause the number of estates owing estate tax to soar nearly 15 fold from this year to next, from an estimated 3,300 estates in 2012 to 52,500 in 2013, according to the independent Tax Policy Center. What’s more, the top tax rate would increase from 35 percent to 55 percent, and surviving spouses would no longer be allowed to claim any exemptions not used by the spouse who died. People are going to get walloped.

Many of my clients have estates worth between $1 million and $2 million, and while that may make them wealthier than the average American, many of them don’t feel rich at all. That’s partly because, to value an estate for tax purposes, the law adds up the total net worth of an individual or couple, including everything from real property, businesses, securities and life insurance to the baseball collection in the attic. Yes life insurance and IRA’s are included in this calculation. Under current law, the exemption is $5.1 million for an individual and $10.2 million for a couple, if you have a proper Trust, but if the law follows its current trajectory, some families could see their entire exemption eaten up by their home or business alone.

The estate and gift tax are one significant area where consumers could feel the effects of the fiscal cliff, the $600 billion mixture of tax hikes and automatic spending cuts that will go into effect on Jan. 1 if Congress doesn’t act before then to prevent it.

That leaves just a couple months for people with sizable estates to use up some of their exemptions now—and that’s not much time. Estate plans tend to be complex, involving various moving parts that usually require the help of attorneys, accountants and financial planners. While you might be able to file a complicated tax return by pulling an all-nighter with TurboTax, the same can’t be said for an effective estate plan.

Remember, the time spent designing the nature and structure of this most final of acts is well invested.

To find out more, go to the Law Offices of Daniel H. Alexander’s website or call us at (800) 530-4529 for a free consultation.


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