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NOTE: UPDATES TO THIS SITE REFLECTING THE AMERICAN TAXPAYER RELIEF ACT OF 2012 (2013) ARE ONGOING IN ORDER TO PROVIDE A COMPREHENSEVE REPORT. NEW INFORMATION HAS BEEN WRITTEN IN ITALICS .
The American Taxpayer Relief Act of 2012 ("ATRA"), was signed into law by President Obama late in the evening on January 2, 2013. Congress enacted this tax legislation as part of its effort to avert the fiscal cliff. As a result of the complex implications to the estate planning process, estate planning for most individuals has been dramatically altered.
The following is a summary of the major provisions that effect estate planning:
American Taxpayer Relief Act of 2012
$5,000,000 exemption, indexed for inflation.
$5,250,000 in 2013
Unified: gift, estate and GST
40% estate tax rate
The new law means that the vast majority of people will never have to worry about estate taxes, and may prefer to simplify their estate plan. The law provides that the estate and gift tax exclusion amount (the amount that can pass estate and gift tax free) is $5,000,000 per person. In addition, a surviving spouse may be able to use a deceased spouses exclusion amount that was not used by him or her at their death, a concept called " Portability." For most, it would be prudent to re-evaluate their estate plans and documents. Many married couples included in their estate plans an AB Trust, also known as a Family or Bypass Trust, in order to ensure the use by both spouses of the much lower estate tax exclusion amount that was available at that time. This may not be necessary now given the $5,000,000 exclusion. If avoiding estate tax was the only reason that the Bypass Trust was included, you may be subjecting your surviving spouse to unnecessary complexity and expense after you die. In addition, a Bypass Trust has the disadvantage of not allowing the tax basis of appreciated assets to be increased to the fair market value as of the date of the surviving spouses death, "step-up in basis."
That is not to say, however, that all Bypass Trusts should be eliminated, there are non-tax advantages to retaining it. For example, perhaps your existing revocable trust was designed to limit the use of funds by the surviving spouse, to provide management for the surviving spouse of trust assets, or to direct the disposition of assets upon the death of the surviving spouse. For theses cases, the Bypass Trust may still be appropriate. Unfortunately for clients, Congress has looked kindly upon estate planners by making the decision not effectively dealt without an understanding of client motivations by the attorney, thus leading to our recommendation that most individuals should re-evaluate their plans.
Having said that, if the only reason for establishing a Bypass Trust within your revocable trust is to reduce or eliminate estate tax, you may decide to simplify your trust, and the trust administration after the first death, by making the Bypass Trust effective only if elected by the surviving spouse after the death of the first to die. This is called a Disclaimer. Although simple, the procedure is very specific and proper legal documentation is critical, both in drafting the trust and in making the election.
Many individuals have been reluctant to spend the money to update planning because of the constant changes in the estate tax that Congress has put us through. I think that now there is some certainty in the law, people that have been sitting on the fence to review their estate plan can now move forward with the comfort that at least for the foreseeable future we will not have these looming pendulum swings in the estate tax that has heretofore been foisted upon us.
The fact is, that although estate tax has been the factor that has primarily driven people to seek estate planning it has never been the sole or even primary benefit to planning. The myriad of other planning issues, as most that have gone through the process can attest, are often the real benefit to estate planning.
Estate planning is the process of protecting your assets during your life, directing the disposition of assets upon your death, and providing continued protection of the assets for your heirs after you die. In addition, health care matters are addressed with formal documentation indicating your health care choices.
During your life, tools such as a revocable trust and durable powers of attorney guard against mismanagement upon your incapacity. You may select a successor trustee to manage trust assets and an agent under a durable power of attorney to manage assets that are not typically placed in a trust, such as a life insurance policy or an IRA. In a Health Care Power of Attorney you select an agent to make health decisions if you are unable and to provide life support guidelines. Your revocable trust, or a Will, if you do not have a trust, directs the disposition of assets upon your death and if you are married may contain provisions that reduce or, possibly, eliminate estate tax if your estate exceeds the exclusion limit provided by law. An advantage of a trust over a Will is that a trust avoids the cost and delay of probate. Your estate plan should address property titling to ensure the title reflects your desire with regard to community property or separate property and that the revocable trust has been "funded." The payment of life insurance proceeds and retirement plan benefits at death is directed by beneficiary designations. These should be coordinated with your entire estate plan.
If you have children, guardians should be selected to care for them during their minority, a trust established for their benefit, and a trustee appointed to manage the assets and make distributions to your children as dictated by the trust.
The extent of your plan depends upon your specific family and financial circumstance. We would be happy to assist you in the design and implementation of a plan that addresses your specific needs in an economical and efficient manner.