Why you need to think about your estate today.

In December 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act. Among other things, it made major changes to the rules governing estate and gift taxes for 2010-2012 that benefit families with larger estates. While there are discussions about extending the benefits of the Act, it’s an election year. You should plan today as if the benefits were expiring, whether for your estate or an inheritance you may receive.

Estate Tax Exemption Reverts from $5 Million Back to $1 Million
Currently, the law provides a generous $5.12 million per person federal estate tax exemption. Estates are then taxed at 35% over that. The lifetime gift exemption has also temporarily been raised to $5.12 million per person. Starting January 1, 2013, both revert to $1 million, and the feds will take 55% of each dollar above that. Note that many states (Georgia is not one of them) have separate estate and inheritance taxes on top of the federal tax.

If that weren’t bad enough, the “portability” provision will also expire. Portability currently allows unused estate tax exemptions from a spouse who has died to be passed on to the surviving spouse’s estate, essentially allowing married couples to pass up to $10 million tax exempt to their heirs.

Your Estate Tax Liability Could Increase By 50% or More
The bottom line is that a $5 million estate would be federally taxed $0 in 2012 or $2.2 million after 2012. That’s a big swing worth some attention today. In addition to crossing your fingers that congress will do something about the expirations, here are three things you should be thinking about today to prepare for the worst case:

  1. Review your estate plan – You may want to change allocation of assets based on lower exemptions and loss of portability. Also, systems such as AB Trusts again become important to make sure couples can take full advantage of whatever exemption is still available once the portability provision expires.
  2. Build a plan if you don’t have one – Ensure you have full control of how your estate is distributed, rather than letting the state control the process. Also, you can limit the tax liability associated with gains on your assets through implementation of specific trusts, such as Grantor-Retained Annuity Trusts.
  3. “Gift” money to your family – This may be an opportune time to give money or assets to your family members, even if you have already gifted the full $1 million maximum tax exempt amount before the current Act. You can still place assets in trusts, but you lose control after the gift is made.

Seek Legal and Financial Advice
To do this right, you’ll need to discuss your specific situation and financial goals with your attorney, as well as a Certified Financial Planner. Better to do this now, rather than holding your breath and hoping that a lame duck Congress will set new tax policy for 2013 and beyond.