A look at your 2012 year-end estate planning

Dan Vogel

Once again we are reaching the close of a tax year end with uncertainty as to the estate tax law that will be in place next year. While there is generally broad consensus between Republicans and Democrats alike that the exemption amount should be fixed at between $3.5 to $5 million dollars, this law like many is being held hostage for other income tax and budgeted spending issues for which there is little consensus. What do we do then?

 Let’s look at what we do know about the 2011/2012 law

    For deaths in both 2011 and 2012, the estates of these individuals enjoy an exemption amount of around $5 million dollars. The gift and estate rules are unified, thus an individual can gift that $5 million amount away during their lifetime, or they can wait till their death to transfer that amount, or some combination of the two as long as the combined lifetime and death transfers do not exceed $5 million. The rate that applies to assets in excess of this generous $5 million exemption is capped at 35 percent.

            The law starting in 2011 also added a new feature called portability. The concept is to carryover, or port the unused exemption amount from a deceased individual to their surviving spouse. Thus if a person dies and only uses $3 million of their exemption amount, the unused $2 million exemption can be carried over to the survivor.

            In order to use this feature, a timely filed estate tax return needs to be filed for the deceased spouse so that the unused exemption amount can be properly determined. The estate tax return is normally due 9 months after date of death. For 2011 deaths, special rules apply for filing these returns. For 2012 deaths, the first due date for these returns will be coming up depending on what day in 2012 the death occurred. 

Let’s look at what 2012 will bring if Congress does nothing

            If the law is not changed, we also know the maximum estate and gift tax shelter will revert to $1 million for deaths starting in 2013. The rate that will apply to the taxable portion of the estate will also change from 35 percent to 55 percent.  And if that person has utilized the 2012 law to gift as much as $5 million, we do not know how that excess will be handled, or clawed back as the term is used. Portability would go away also if we revert back to old pre-Bush tax rules.

What you should do in the meantime

            If you have the resources both to make the gift and retain enough assets to live on for the rest of your life, consider a lifetime gift between now and the end of the year of up to $5 million dollars. The gift can be outright or in the form of a trust. You should not be in any worse position than not making the gift and even if the exemption is brought back to $1 million, this excess may not be subjected to clawback, putting you in a more favorable position than someone who made no gift at all.

            If there is any possibility that the unused exemption amount for an individual dying in 2011 or 2012 could be utilized by the surviving spouse, then file the Form 706 Estate Tax Return for the deceased spouse. And if the death was in 2012, at least extend the return at the 9 month anniversary of death so that you can buy six additional months to decide if filing the return is prudent. With the additional time, you may have greater certainty as to the final estate tax law.

When we will know

            Congress gets back to work September 10, and breaks again for the month of October ahead of the November elections. After the elections, the lame duck session will consist of roughly two weeks in November and two weeks in December. There is added pressure to more permanently fix the estate and income tax rates that are all scheduled to go up next year, or risk going into a recession.

            Please see your tax advisor regarding any year-end estate planning moves.