In our last post, we began looking at some of the ways the recent fiscal cliff deal has changed the face of estate planning. In this second part, we'd like to offer some suggestions for specific strategies folks might wants to consider when engaging in estate planning this year.
The recent fiscal cliff deal was a big deal in the estate planning world. In addition to setting the federal estate tax exemption amount permanently at $5.25 million-to be adjusted annually for inflation-the recent fiscal cliff deal also moved the federal estate tax rate from 35 percent to 40 percent. Married couples may pass on $10.5 million free of estate tax, and spousal portability permits a surviving spouse to use any remaining portion of their deceased spouse's federal estate tax exemption amount.
In our last post, we informed our readers about the new gift and estate tax rules that came out of the recent fiscal cliff deal. As we noted, the potential change has been a huge issue in the estate planning world for some time, attorneys not knowing what the future would hold and clients not sure what to do with their wealth. The bottom line is that the system that has been in place over the last two years was extended indefinitely.
We want to update our readers on how the fiscal cliff deal will affect gift and estate tax planning in the coming year. This has, as our regular readers know, been a big issue in the estate planning world, and had many people taking last minute precautions over the last several months, so let's take a look at what happened.
In our previous post, we mentioned that the ever changing gift and estate tax law is set to change again in a couple weeks. Now there is now only a tiny window of time to take advantage of the current very favorable conditions for passing on wealth. Once again, if Congress doesn't act in the next weeks, the combined estate and gift tax exemption is set to drop from over $5 million with a 35 percent tax on gifts and bequests exceeding that amount, to a $1 million exemption with a top tax rate of 55 percent.
Many of our readers may already be aware of the big changes coming to the estate and gift tax in 2013. Essentially, the current exemption amount and tax rates are set to shift in the coming year back to their pre-2001 numbers.
As we've mentioned in the past, the start of 2013 will see a substantial increase in the estate tax, often referred to by many as the death tax. While Congress still has the ability to take action in the next few weeks to prevent this from happening, this appears to be highly unlikely to happen.
In our last post, we took a look at Grantor Retained Annuity Trusts and their effectiveness as a vehicle for reducing estate and gift taxes. Unfortunately, this planning technique and a number of others may soon be rendered much less useful if president Obama's recent budget proposal passes into law.
One of the many estate planning tools available, a Grantor Retained Annuity Trust (GRAT) is a trust to which assets are transferred for a retained annuity, which is a periodic return of the assets with interest. In a GRAT, this return lasts as long as the trust's duration. These estate planning tools can allow for significant asset transfers to family and other loved ones with minimal or no gift tax consequences.