ORIGINALLY PUBLISHED IN FEBRUARY 2011, BUT STILL VERY APPLICABLE TODAY >>>

 

Many of you have been asking us about the new estate tax laws that passed at the end of 2010.    Should I make gifts now to take advantage of the new higher gift tax exemption rates? Do I still need to consider using trusts in my estate plan?

The changes made for 2011 and 2012 were positive changes for the taxpayer.  There is now a $5 million exemption and a top tax rate of 35% for both estates and gifts. In addition, the $5 million exemption is portable between spouses giving a married couple the opportunity to pass $10 million in assets to their heirs without incurring estate tax. However, there are some filing requirements at the death of the first spouse to take advantage of this benefit. In 2013, although it is not probable, the exemption is scheduled to return to $1 million with a top bracket of 55%.

So, should you take advantage of the new $5 million unified credit by making gifts now? If you have substantial assets that you want to leave to your heirs – Definitely! With no absolute assurance that the unified credit will not shrink in 2013, the next two years are a perfect time to move assets to the next generation and take advantage of this higher exemption. This will shift future appreciation and income to your heirs without creating a current tax burden. The $13,000 annual exclusion ($26,000 for a married couple) is still applicable for both years.

In the past, many taxpayers have shifted the ownership of their assets to family companies. Is this still necessary? Yes. Shifting ownership of family assets to various family entities, allows the family to share income and management burdens. If structured correctly, it can also segregate clusters of assets for liability protection purposes. In addition, there was no new legislation that further limited the availability of discounts to family owned businesses.

Should you have your Last Will and Testament reviewed in light of these new changes? We think that is a good idea. Many wills were written when the unified credit was much lower, from $1 million to $3.5 million. The will may contain distribution clauses governing income in a family trust that could prevent your surviving spouse from receiving sufficient income to continue to live after your death in a manner that you would prefer. It may, also, leave assets between two trusts in proportions that will benefit one heir to the detriment of another depending on the funding formula.

Finally, is there any need for a trust or trusts, particularly with the new portability of credit provisions and the higher exemption? Yes. Trusts can be structured to provide income to your surviving spouse while ultimately protecting the assets for your children and grandchildren. Trusts can be designed to take care of needs that you know will arise after your death. So, while the need for trusts may not be as great as it was, it has not been eliminated.

Remember that all of these changes are effective only for 2011 and 2012. These advantages need to be secured now, as there is no guarantee they will be extended past 2012. Please feel free to call JamisonMoneyFarmer PC if you wish to discuss your estate planning needs.