New Opportunities Under the New Estate Tax Law

It’s hard to imagine that Abraham Lincoln, Michael Jackson and Pablo Picasso have anything in common but it turns out that they do…each of them died without having a properly executed last will and testament. One was an attorney and president of the United States, one was a musician whose estate has produced over $200 million in revenue since his death and one was an artist who left a fortune in artwork and whose estate ultimately cost his heirs over $30 million to settle.

This year and next, you have an opportunity to revisit your own estate plan in light of a recently passed estate tax law that offers many opportunities for business owners, wealthy families as well as the ‘not yet wealthy’. The reason your ‘opportunity’ is time-sensitive is that this new law is set to expire December 31, 2012. Here’s a quick review of the major provisions of the new law as well as several planning strategies worth considering:

• Up to $5 million exempt from estate taxes. The amount that you can leave a non-spouse (including a trust) without paying estate taxes is $5 million. If you are married, you can each leave $5 million for a total of $10 million. If congress doesn’t make any changes, this exemption amount will drop to $1 million beginning in 2013. Planning point: Many wills use a formula that states that the maximum amount allowed under law first goes to fill up the family trust with the balance going either outright or in trust for the surviving spouse. With this higher limit, it means that in many cases all of the assets will go to the family trust and none to the surviving spouse either outright or in the marital trust. For many families, this is an unintended consequence. Have your attorney review your documents to determine if changes are warranted.
• Portability of Exemption Amount. If your spouse dies without using his or her full exemption amount, any unused exemption is transferred to the surviving spouse. In the old days, the unused amount was simply lost. To solve this problem under the old law, advisors would direct clients to transfer assets from the name of one spouse into the name of the other in order to ‘equalize’ their estates. This was often a challenge particularly if one spouses’ assets were largely held in a retirement account. Planning point: Theoretically, this activity of equalizing the estates between spouses is no longer necessary since the surviving spouse now ‘inherits’ the deceased spouses’ unused exemption. However, if the surviving spouse were to remarry, the exemption of the deceased spouse would be lost forever. When you review your estate documents, decide if assets need to be transferred between spouses to make certain the full exemption is available to both of you. Transfers between spouses during life or at death are not subject to either gift or estate taxes.

Next week I’ll complete my discussion of the new law and the planning opportunities it presents. Specifically we’ll look at opportunities for small business owners; families with large estates; as well as strategies for folks with smaller estates.