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2012—The Last Chance for Effective Estate Planning? (Oregon)

By  Amelia E. Heath and Patrick J. Green
06.05.12
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Have you been waiting for Congress to “fix” the federal estate and gift tax law? Well, if Congress enacts President Obama’s budget proposals, the “fix” will be in, but it won’t have been worth the wait because the proposals reduce the estate and gift tax exemptions and limit many effective planning tools. Congress might or might not act on these proposals. If Congress fails to act, even higher tax rates and lower tax exemptions will automatically kick in on Jan. 1, 2013.

What does this mean for you and your family? We recommend that you seriously consider taking advantage of the current federal tax law this year. Here’s why:

There are three possible federal tax scenarios that could affect your estate planning: (1) 2012 law as it currently exists; (2) 2013 law that will become effective Jan. 1, 2013 if Congress does not act, and (3) the President’s proposal to change the 2013 law. Here is a summary:

Tax exemptions and rates:

 
2012 Law
2013 Law
President’s proposal for 2013
Gift tax exemption
$5.12 million
$1 million
$1 million
Estate tax exemption
$5.12 million
$1 million
$3.5 million
Generation-skipping-transfer tax exemption
$5.12 million 
$1.3 million
(approx.)
$3.5 million
Gift and estate tax top rate
35%
55% (60% between $10 million and $20 million)
45%

Estate planning tools and techniques:

 
2012 Law
2013 Law
President’s proposal for 2013
Grantor retained annuity trusts
As short as 2 years
As short as 2 years
At least 10 years
Sales to grantor deemed ownership trusts
May reduce taxable estate
May reduce taxable estate
Does not reduce taxable estate
Irrevocable Life Insurance Trusts
Life insurance proceeds not in taxable estate 
Life insurance proceeds not in taxable estate
Life insurance proceeds may be included in taxable estate
Use of discounted gifts of interests in family business entities
Permitted
Permitted
Not permitted 

 
What can you do about these changes?

  1. Act in 2012. Consider making gifts to take advantage of the available federal exemptions.
  2. If you’re not ready to give away assets on which you depend, consider establishing a lifetime spousal trust, which will capture all or part of the $5,120,000 exemption today and preserve it even if the federal exemption amount decreases.
  3. Consider using a family limited liability company for business interests, real estate or stock and bond investments to capture tax benefits.
  4. Consider establishing long-term trusts for spouse, children and grandchildren to capture current high generation-skipping transfer tax exemptions to preserve wealth for future generations and to serve as a “family bank.”
  5. Consider establishing a life insurance trust to provide a source for payment of estate tax independent of family business, real estate or investments.
  6. Consider creating a qualified personal residence trust to transfer the family home or vacation home to the next generation over time.

Although no one can predict what the law will be in the future, it is quite likely that the federal tax law will not be as favorable or as generous for planning occurring after 2012.

Planning this year can capture current benefits before they disappear. We recommend that you call your advisors soon while there is still time to consider effective planning.

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