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The End of Estate Planning?

Not quite, but close to it for many taxpayers.

As part of the American Taxpayer Relief Act (ATRA) of 2012, a benefit you may appreciate has been slipped in, a ‘permanent’ fix to the estate tax issue. First, here ‘permanent’ simply means a provision that has no sunset date, no automatic falling off the tax forms. That said, let’s look at the estate tax, before and after, and why you should be concerned about this even if you are not a ‘one percenter.’

In 1998, the year our daughter was born, we bought life insurance. Since we both worked, and had similar incomes, we each bought a million dollar policy. This may sound like a lot of money, but we had a house with a mortgage, and college tuition 18 years hence, both of which would whittle this windfall down pretty fast. But. As I learned in 1999, estate tax would kick in for an estate over $650,000. So even if we had no other assets, our insurance of $2M would see $700K taxed as high as 50% if my wife and I should perish together. It gets worse from there. If I passed first, I could leave an unlimited inheritance to my wife, but then if she would die soon after, $1.35 (everything over $650K) is subject to estate tax. Off to see an estate attorney. Time to set up trusts. With a bit of financial smoke and mirrors, the insurance is purchased from small gifts given to my daughter through the trust. In other words, the insurance itself is not part of our estate. Back then, I’d have casual conversations on death and dying (I know, real ‘life of the party’ discussions) and I realized most people had no idea that if you own the insurance policy, it’s part of your estate when you die. So even a couple with a $500K policy each could be heading for an estate tax issue. Maybe not when the first person passes, but when the surviving spouse also passes and still owned all the assets from when they were both alive.

Enough history. ATRA (Bonus points – what does this acronym stand for?) provides some excellent estate tax details:

  • A $5 million per person exemption (indexed so 2013 should be $5.25M)
  • A top rate of 40% (kicking in on amounts over $1M taxable)
  • ‘Permanent’ portability. i.e. the surviving spouse adds on the exemption to her own estate, so a couple truly has a $10.5M exemption
  • The annual gift exclusion is $14K per person for the year, but the full estate tax exclusion may be tapped for lifetime giving as well.

If you are blessed with wealth over $10.5M, the $14K annual gift may not seem like much, but keep in mind it’s per giver/recipient combination. So, you and your spouse can give $56K per year to your child and spouse. You can also gift each of the grandchildren $28K. With a large enough family, the total can easily exceed $250K if you are looking to be that generous.

On a final note, you can see how, in 1998, with no clear understanding that the estate tax would take such a generous turn, it seemed the right thing to do a bit of extra planning. Today, we’d save the expense of a trust, and only have a will in place.

  • Dave January 11, 2013, 8:55 am

    I would point out that many states still have estate taxes with much smaller exemptions. For instance, Maryland has a 16% tax on estates over $1M, with no portability. For that reason, estate planning may not be quite dead yet (at least in some states).


  • JOE January 11, 2013, 1:40 pm

    Dave – You are right, this article, as most in the news lately, are looking at federal only. Time for me to research and perhaps offer an overview of the State level Estate tax for the new year.

  • Amit January 11, 2013, 7:14 pm

    There is also probate.
    Assets inside a trust bypass probate. Otherwise assets ove a certain small amount (100k i think) will have court costs. In California this is upto 9%.

  • JOE January 14, 2013, 4:01 pm

    Excellent point, Amit, thank you.

  • Steven January 18, 2013, 1:40 pm

    Why can’t you put your assets in a Nevis LLC or other US LLC like Wyoming, Delaware or Nevada? Doesn’t this avoid estate taxes all together. You simply change the manager and the investment assets are controlled by the next manager (your heirs or whoever you want) set up as a disregarded entity doesn’t this avoid all the problems? Please advise. thanks.

  • JOE January 18, 2013, 1:44 pm

    Interesting idea. Honestly, my knowledge regarding using LLC is very limited. I’ve not seen them suggested for this purpose.

  • Steve January 18, 2013, 8:12 pm

    Perfect reason to move to Florida or any other state with no estate tax.

  • JOE January 18, 2013, 8:22 pm

    Ha! Actually, it’s among the things to consider, I suppose. No offense to Florida, but it’s not for me.

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