A permanent $5.25 million estate tax exemption per person!

If you are a very high net worth individual or family, you definitely are breathing a sigh of relief and offering some thanks to Congress and President Obama for coming together and reaching a compromise to avoid a drop to a $1 million exemption. It is estimated that this new law eliminates the estate tax for 99% of the population.

So what does this mean for families who are merely “affluent” (e.g. estates under the $5.25 million individual exemption amount)? In reality, not much other than a big sigh of relief. These families still should be talking with their financial advisor or estate planning attorney about comprehensive estate planning — they just don’t need to focus on estate tax concerns as part of that planning. Instead, they are free to focus on more fundamental concerns such as probate avoidance, inheritance protection for beneficiaries from ex-spouses or creditors, proper selection of trustees, etc.

For some perspective on the new law, let's take a look a the estate tax rollercoaster that it has been for the past decade. 

Jan. 2, 2013 marked the end of more than 10 years of questions about estate tax exemptions. It’s been a bit of a wild ride for affluent families as well as for those in the estate planning and wealth management industries as we racheted up from a $675,000 exemption back in 2001 to the temporary elimination of the estate tax in 2010 to a $5,120,000 exemption in 2012.

As Dec. 31, 2012 approached, there was a great deal of uncertainty with the estate tax exemption amount scheduled to drop all the way back to $1 million per person without new legislation. Fortunately for very high net worth families, Congress “permanently” enacted legislation that sets the estate tax exemption amount (the amount that an individual can pass during their life or at their death) at $5.25 million and indexed that amount for inflation. Amounts transferred above this exemption amount will be taxed at a new rate of 40%.

This means you may need to review your existing plan. Estate plans drafted prior to 2013 – and especially those drafted more than a decade ago should be reviewed by your estate planning attorney for a number of reasons, most specifically to avoid what may be an unnecessary “split” into two trusts.

When the exemption amount was lower and there was uncertainty about the future of the estate tax, many plans were set up to require the division of a living trust into two separate trusts in order to qualify each trust for the full exemption amount. Under the new law, which features both a high exemption amount and the benefit of “portability” (the ability to combine the individual exemptions of two spouses without setting up separate trusts), the mandatory creation of two trusts may be unnecessary and costly.

As an example, if a couple with a net worth of $2M million set up a trust in the year 2000, it’s likely that it would have required a split into two trusts  at the death of the first spouse. In addition to requiring an extra tax filing each year for the additional trust, all of the assets in the second trust would miss out on the potentially valuable “double step-up” in cost basis, thus sticking the beneficiaries of the second trust with a capital gains hit that could have been avoided.

Bottom line, for very high net worth families, the new law is a welcome end to uncertainty and a historically unprecedented opportunity to pass on wealth without taxation in a thoughtful and patient way.

For affluent families, the passage of the new law means that their focus can shift from estate tax planning to more fundamental planning issues. These families should be sure to have their existing plans reviewed to ensure that they are optimized for efficiency under the new law.

Curtis Kaiser, JD/MBA, a certified specialist in estate planning, operates Kaiser Law Group, a boutique estate and business planning firm focused on helping families and small business owners efficiently plan for their futures.

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