The implementation of the Economic Growth and Tax Relief Reconciliation Act of 2001, which both increased the Federal estate tax exemption and more importantly eliminated the state estate tax credit, started the process of "decoupling" between the Federal estate tax and various states. As the years moved forward, many states retained a $1 million estate tax exemption amount, decoupling their exemption from the Federal amount that has ultimately risen to its current $5 million level. However, the reality is that a second decoupling just occurred in 2011 - the decoupling of state estate tax exemptions from the Federal gift tax exemption. As a result, a new state estate tax planning "loophole" has opened up, creating a planning opportunity for many clients... but only until the states close the loophole.Read More...
Lifetime gifting is a widely accepted technique for managing potential exposure to future estate taxation. The purpose of the strategy is not just the obvious "if I give it away while I'm alive, I can't be taxed on it when I die" - due to the fact that both gifting and estate taxation share the same single lifetime exemption amount that is protected from taxation. Nonetheless, gifting can still be highly effective, because once the asset is transferred, all future appreciation is in the hands of the donee, and not the donor; as a result, the value of the asset is "frozen" at its value on the date of gift in terms of its cumulative gift and estate tax impact. And with the gift tax exemption recently increased to $5 million - and only until the end of 2012, after which it is scheduled to lapse back to $1 million - many estate planners are counseling clients to make some big gifts while they can. There's just one problem: it's not clear whether a future reduction in the gift and estate tax exemption could indirectly cause a so-called "recapture tax" on prior gifts.Read More...
Planning around estate taxes by using a Bypass Trust is a "basic" strategy that has been around for decades. In fact, for many clients, it was a major impetus to get their estate planning done in the first place - if your estate was above a certain threshold and you didn't get estate documents that would put a proper Bypass Trust in place, it could cost your beneficiaries hundreds of thousands of dollars.
Yet with the new provisions of the tax legislation signed into law last week by President Obama, Bypass Trusts will no longer be necessary for many clients to maximize the use of a couple's estate tax exemptions - which means it may be time to bypass the Bypass Trust planning strategy.
Do your clients have retirement accounts held directly with Vanguard? More than one? Do you know who the beneficiaries are for each account? Are you SURE you have that right? Sorry, think again.
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