As the “Fiscal Cliff” debate dragged on through the end of 2012, every estate planning conversation had to start with a discussion of the potential “what if’s”. For what is now historical reference, at 12:01am on January 1, 2013 the estate tax exclusion amount was scheduled to suddenly drop for the first time in history - from $5.12M per individual and $10.24M per married couple to $1M and $2M respectively. Simply stated, the exclusion amount is that value of an estate that is not subject to estate tax – which l refer to as the “tax free amount”. This draconian decrease threatened to change the landscape from a reasonably comfortable safe harbor to a tax on most of the middle class. When you start adding the value of a home, life insurance, and a 401(k) $1M because a very narrow threshold.
As the panic continued through the election, I felt that the worse possible legislative compromise would be $3.5M and $7M respectively as the President sought to roll back the tax free amount and the rates to 2009 levels. As the discussion heated up prior to the ball dropping in NYC, it seemed to me that the estate tax would be an easy give away for the President, and so it was. While income taxes continue to be a hot topic, the estate and gift tax issues get very little attention.
CAVEAT: Federal estate, gift, income, and generation skipping transfer tax issues are interrelated in a complex fashion and one should consult with an estate planning or tax professional for a complete understanding.
I offer this article as a primer for conversations at cocktail parties, the coffee shop, and points in between home and the proverbial water cooler. Here are just a few discussion topics that will give you instant credibility when visiting with your friends, golf foursomes, CPA or financial planner.
WARNING: To take advantage of the portability feature, an estate tax return must be filed for the husband making this election. This is a potential trap for the unwary.
So there you have it. When a casual conversation about estate and gift taxes arises, step right in and use the buzz words and phrases – “permanent” – “$5M indexed for inflation” – “40%” – “portable” – “GSTT is complicated” – “consult an estate planning or tax professional”.
© Will Morris, JD, LLM 2014