FEDERAL ESTATE TAX UNCERTAINTY

By now, many have heard about the pending "fiscal cliff", which refers to the December 31, 2012 deadline for the federal government to enact new tax legislation to avoid tax increases that would go into effect on January 1, 2013.  Those tax increases would also include a reduction in the federal estate and gift tax exemptions, which means that many more individuals or their estates will be subjected to estate and gift taxes as of January 1, 2013 unless Congress passes new legislation.

Currently, individuals can avoid federal estate and gift taxes on up to $5.12 million. But that $5.12 exemption amount will be reduced to $1 million by January 1, 2013 unless new laws are passed. Virtually all assets are included in one’s taxable estate for federal estate tax purposes; so many estates will exceed that $1 million exemption.  And with the maximum estate tax rate scheduled to rise to 55%, the federal estate tax bill can be a huge hit on a family’s inheritance. In addition, New Jersey residents should be aware that their estates are also subject to New Jersey estate taxes on estates above $675,000.  (See my previous blog dated May 30, 2012 entitled "Talking About New Jersey Death Taxes").

What can we expect the federal government to do regarding the estate and gift tax laws? The truth of the matter is that it is virtually impossible to predict what Congress and the President will do in this area. However, most folks involved in estate planning believe the government will pass new estate and gift laws at some point in the near future, though perhaps not before January 1, 2013.  Few people believe that the government will allow the exemption be set at $1 million for long, if at all, because this would represent a dramatic difference from the current exemption which is 5 times larger.

Nevertheless, in these times of government gridlock and high government deficits, it is entirely possible that we will end up with a $1 million estate and gift tax exemption through either government action or inaction. With that possible outcome, many folks should consider planning options such as gifting with the goal of excluding those gifted funds from one’s estate and avoiding estate taxes.

For those people who live comfortably and are seeking to reduce their estate and gift taxes while benefiting close relatives, the most common form of gifting is to make annual gifts of $13,000 to each person whom they wish to benefit. There are other estate and gift tax planning options, such as gifts to an irrevocable trust, or establishing an irrevocable life insurance trust, and the best planning will depend on each individual’s circumstances and intentions.