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Estate Planning: A New Measure of Certainty for Estate Planning

The new American Taxpayer Relief Act of 2012 enacted in response to the infamous Fiscal Cliff  now provides estate and financial planners with more definite rules for the foreseeable future.

The Federal estate tax exemption was set to drop from $5.12 million per person to $1 million per person in 2013. This would have meant significant changes for many high net worth individuals. The rate was previously set to a 35% tax on estates when the value of all property, stocks, cars, and any other assets exceeded $5.12 million at the time of their death.  If the tax free threshold on estates was reduced to $1 million, than any individual whose estate was valued to be more than $1 million would be taxed exponentially more than before.     

The possibility of a lowered estate tax exemption set off a scramble in the waning months of 2012. The uncertainty around the law led many people to begin consulting advisers to protect assets from possible exposure to the new estate tax such as large charitable donations and creating trust funds.  

The federal estate tax has gone through twists and turns over the past decade, posing planning concerns among those potentially exposed to it. In 2001, Congress established a federal estate tax structure that gradually reduced the top tax rate and increased the exemption to $3.5 million per person in 2009.  Congress phased out the top tax completely in 2010. However, its “sunset provision” would have reinstated it on less favorable terms in 2011 unless Congress acted. Congress did act in December of 2010 to provide for a $5.12 million exemption.  Again, this exemption had a sunset provision which expired at the end of 2012, after which the temporary law would expire and a non-portable exemption of $1 million would be instated.

Just as the new exemption was slated to take effect at the end of 2012, Congress took action in the eleventh hour to create a more permanent framework with the passage of the American Taxpayer Relief Act.

The main change in the Act for estate planning is an increase in the top federal estate tax rate from 35% to 40%. Otherwise, the basic features of the temporary estate tax law enacted in 2010 which was set to expire after 2012 all remain in place. That is with the exception of any sunset provision.  Basically, this means that the $5.12 million exclusion (indexed for inflation each year) from federal estate tax will remain in place, hopefully preventing the need for any additional “December scrambles” to extend the new law.   

For married couples, the exclusion amount available to each spouse is “portable” between them so that any portion of the $5.12 million-plus exclusion that is not used in the estate of the first spouse to die is available to the surviving spouse. Thus, a married couple has a combined exclusion of more than $10 million, regardless of the structure of the estate of the first spouse to die.

The Act has no effect on Maryland’s estate tax, for which the exclusion remains $1 million per person with no portability between spouses, and a top rate of 16%. Most people would assume that this threshold does not impact them because they don’t consider themselves that wealthy. However, the value of life insurance policies and home equity may tip many to be exposed to the Maryland estate tax. That is one of the many reasons estate tax planning is always advisable.  

For more information please contact Jay Merwin at 410-583-2400 or merwin@bowie-jensen.com.

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