Estate planning has evolved into an art form over the last century. The days when a simple Last Will and Testament sufficed to distribute estate assets upon your death are long over. Without a carefully thought out estate plan, you could lose over half of your estate assets to estate taxes. Although gifting assets during your lifetime is an option, the gift tax can also take a significant bite out of your estate assets without careful planning. This year, both the estate and gift tax rates are at historically low rates. Likewise, the estate tax and gift tax exemption amounts are at all time highs. Both of these are currently set to change for 2013 unless Congress acts before the end of the year. If your estate will be affected by the changes, now is the time to consult with your estate planning attorney about how best to handle the upcoming changes.
The estate tax is levied on a decedent’s estate if the total estate assets at the time of death exceed the estate tax exemption amount. For 2012, the estate tax exemption amount is set at $5.12 million. That means that only estate assets over $5.12 million would be taxed if an individual died this year. For assets that exceed the exemption amount, they are currently taxed at a rate of 35 percent.
The current rate and limit are both set to expire at the end of 2012 and return to the previous tax rate of 55 percent and the previous exemption amount of just $1 million. To put this in perspective, imagine that you have an estate valued at $7 million. If you die this year, $1.88 million will be subject to the estate tax at a rate of 35 percent for a total tax liability of $658,000. If the rate and limit return as scheduled for 2013, the same estate would incur a tax bill of $3.3 million.. Every dollar paid in estate taxes is a dollar less left to your loved ones.
Although the average taxpayer is not impacted by estate taxes at the 2012 exemption amount, many more will be affected if the amount is reduced to just $1 million. If you are one of those people, be sure to talk to your estate planning attorney about estate planning tools that can be used to help minimize estate taxes upon your death.
The gift tax faces the same potential scenario for 2013. The gift tax lifetime exemption amount is also currently set at $5.12 million at a rate of 35 percent. It too will return to a lifetime exemption amount of $1 million with gifts over that amount taxed at 55 percent. A taxpayer may also take advantage of the yearly gift tax exclusion rules which allow you to make as many gifts of up to $13,000 to as many beneficiaries as you wish each year free from gift taxes. In addition, yearly gifts made pursuant to the gift tax exclusion do not count toward your lifetime exemption limit. If gifting is part of your overall estate plan, be sure to talk to your estate planning attorney to decide whether you should gift more this year than originally planned or wait to see what ultimately happens to the gift tax.
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