By FPA Members Elaine King, CFP®, CDFATM, and Philip Herzberg, CFP®, AEP®, MSF
Last Updated: July 2, 2012
Given the evolving economic climate and future uncertainties of the estate and gift tax laws, what can you do to strategize planning for the remainder of this 2012 year and going forward?
Keeping in perspective that the Tax Relief Act of 2010 expanded the estate-tax and gift-tax exemptions to $5.12 million in 2012 (indexed for inflation), you should seek the collective guidance of a qualified legal attorney and CERTIFIED FINANCIAL PLANNERTM professional from FPA to ensure your overall financial plan is accounting for these adjustments to the tax exemption amounts.
While these wealth protection strategies may be most appropriate for substantial estates (i.e., larger than current exemption), you should be wary that inaccurate asset valuations and larger life insurance policies can make your estate more susceptible to taxes than you realize. For further insights on reviewing your planning documentation and distributing property according to your aspirations and family needs, refer to the FPA resource, “Thinking the Unthinkable: What Everyone Needs to Know About Estate Planning.”
To assure yourself peace of mind and minimize taxes at death, peruse the following pointers to help you make decisions for the rest of 2012:
- In light of recent Congressional law changes unifying estate, gift, and generation-skipping transfer taxes (i.e., indexed $5.12 million lifetime per-individual exemption and $10.24 million per-couple exemption in 2012), you can consider working in tandem with credentialed estate and financial planning practitioners to discuss opportunities and techniques to pass property now to heirs free of gift tax. Understand that the current unified credit enables you to give away $5.12 million during your lifetime without having to pay gift tax. Should you exceed the $13,000 annual gift tax per-donee exclusion in any year, you can either pay the tax on the excess or take advantage of the unified credit to avoid paying the tax. If you decide to directly pay a portion of your grandchild’s college tuition up to the annual exclusion amount, note that your gift will reduce your taxable estate but not diminish your lifetime federal exemption1.
- Before devising any sizeable gifts to benefit from the current exemption amount and 35 percent gift tax rate, you should evaluate your current financial plan and determine whether you are properly covered for your retirement and medical care. Making lifetime gifts of property likely to appreciate or generate significant income can effectively reduce your transfer tax liability at death.
- Clearly, a lifetime gift can assist you in deciding whether an heir can responsibly handle a large windfall at your death. Gifting may have adverse implications on beneficiaries if they are students applying for college financial aid. With the stepped-up basis on inherited property having returned in 2011, you can consider bequeathing to your heir a significant asset in your estate. Verify the suitability of this approach versus lifetime gifting (original cost basis carries over to recipient), based on situational consequences, including the amount of your possible estate tax and your beneficiary’s tax status.
- Enlist the collaborative expertise of legal, tax, and financial professionals when considering an interest-rate sensitive strategy, such as a Grantor-Retained Annuity Trust (GRAT) or Charitable Lead Annuity Trust (CLAT). Structuring these vehicles can help you magnify asset value, preserve control, and reduce your gift taxes in a low current interest rate environment. Set up a bypass or credit shelter trust to protect assets from creditors and ascertain that the remaining wealth will ultimately benefit your kids, especially if your surviving spouse remarries.
- Can the new portability of the estate tax exclusion amount facilitate your estate planning? Under the statutes of the Tax Relief Act of 2010, your surviving spouse’s future estate can take advantage of any unused portion of your estate tax exemption available in 2011 and 2012. Note that portability does not apply to generation-skipping transfer taxes and may be lost if your surviving spouse remarries. Be aware that portability does not apply automatically and your surviving spouse can transfer your unused exemption only if your executor files a timely estate tax return (within nine months of your death, or fifteen months with an extension).
- To enhance asset protection, you should remember to check the titling of your property and designation of beneficiaries to assure that you have maximized the benefit of the estate tax marital deduction and current exclusions. Cultivate sound business succession and tax planning by organizing business operations as limited liability companies to protect your personal assets from creditors’ claims, bankruptcy, and divorce. Create durable power of attorneys to guard against the loss of control of assets due to incapacity.
Fully acquaint yourself with these tips on how to deal with current transfer taxes in relation to your overall financial circumstances. Timely and proper revision of your estate plan can have a positive impact on your family’s legacy and future well-being.
1Bischoff, Bill, SmartMoney, “3 Tax-Smart Ways to Pay Grandkid’s Tuition,” May 30, 2012.
FPA member Elaine King, CFP®, CDFATM, is Chairman of FPA of Miami-Dade and Author of Family & Money Matters, La Familia y El Dinero Hecho Facil. FPA member Philip Herzberg, CFP®, AEP®, MSF, is President-Elect of FPA of Miami-Dade and Director of Media Relations & Public Awareness for FPA of Florida/Miami-Dade. They serve on the Estate Planning Council of Greater Miami Board of Directors.