Estate Planning's Two-Year Tax Windfall

Without sufficient estate and gift tax planning, estate taxes can consume a substantial portion of the property a person intends to leave for his or her family members or friends upon death. In 2010, the Obama Administration eased up on such estate and gift tax burdens more significantly than many Americans may have noticed. While we are still unclear as to the estate and gift tax laws that will be applied in 2013 and going forward, Americans have a great opportunity for estate and gift planning over the next two years.

Estate and gift tax applies to transfers of property to another either during life or upon death in excess of the applicable estate and gift tax exemption(s) then in effect. Prior to the passing of the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010," ("the Act") there would have been an estate and gift tax exemption of only $1 million in 2011 and an estate and gift tax rate of 55 percent applied to transfers in excess of the $1 million exemption. After the Act was signed into legislation in December 2010, the estate and gift tax rate for 2011 and 2012 was reduced from 55 percent to 35 percent.

Additionally, the estate and gift tax exemption was unified and increased to $5 million. This means that a person can transfer up to $5 million of property either during life or upon death without incurring an estate or gift tax liability on the same. Additionally, any transfers exceeding the $5 million exemption will be taxed at the lower rate of 35 percent versus 55 percent that would have otherwise applied prior to the change in law. However, unless Congress acts to extend such legislation, the above only applies in 2011 and 2012 and the prior estate and gift tax exemption of $1 million and higher estate and gift tax rate of 55 percent is slated to return in 2013.

Long range estate planning is more valuable now than ever. There are other variables that allow for greater savings and flexibility than the exemptions and reduced tax rate alone can offer. For instance, spouses may utilize, or "stack," their estate and gift tax exemptions to potentially double the amount of assets that can be gifted or inherited tax-free. As such, in 2011 and 2012, a married couple could effectively gift or transfer up to $10 million in property to their loved ones without incurring an estate or gift tax on such transfers.

Additionally, there are opportunities to strategically place assets into other vehicles that may allow for gifts and transfers at discounted rates as opposed to the fair market value of the assets being transferred. While these options are typically available regardless of the exemptions and tax rates in effect, such options can be bolstered in conjunction with the exemption and tax rate in effect for 2011 and 2012.

Making the most of these changes takes careful and professionally advised planning and legal advice and we invite you to learn more about these changes and your available options.