The Effect of the American Taxpayer Relief Act on Estate Planning

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After much debate, the American Taxpayer Relief Act, “ATRA” was signed into law by President Obama on January 2, 2013. New and more favorable estate tax, gift tax and generation skipping transfer tax exemptions along with lower payable tax rates have gone into effect.

The estate tax exemption was scheduled to drop January 1, 2013 from $5.12 million per individual to an insignificant $1 million per individual. This drop would have exposed the middle class to the estate tax. Also, tax rates for estate amounts over the exemption would have increased to 55% or even 60% in some cases. Fortunately, ATRA does not change the estate tax exemption, which will remain $5.12 million for individual or $10.24 million for married couples. Anything above exemption amount will be subject to the agreed 40% tax rate.

The portability of the federal estate tax exemption has become permanent. This allows the surviving spouse to use the decedent spouse’s unused federal estate tax exemption without relying so heavily on other legal documents such as by-pass trusts. Although there are still many reasons to use and establish by-pass trust such as asset protection, remarriage of surviving spouse and to avoid the possibility of expensive probate administrative costs, not to mention time.

The ATRA also provided that the unified estate and gift tax exemptions will remain unified. This allows the entire estate tax exemption to be used during your lifetime or to heirs on death. For example, if you exceed the annual gift tax exclusion amount in any year, you can either pay the tax on the excess or take advantage of the unified credit to avoid paying the tax. By using the credit during your life, you will reduce the amount available to offset the estate tax upon death, but by not having the monies accumulating inside your estate this could out-weigh any disadvantages.

The Generation Skipping Transfer Exemption (GST) has also been extended, because of ATRA. This allows those wanting to shift property by gift or at death to a person who is two or more generations below that of the person granting the gift. However, the GST is not portable and for this to be used properly, a taxpayer will need to utilize the proper legal documents. Under this approach, two trusts can be created; one holding property to which the GST exemption was originally allocated and the other holding property not originally allocated to any GST exemptions. Through this approach, the new GST exemption trust can minimize current distributions to older generations and maximize distributions to younger generations such as grandchildren. An approach such as this could offer significant tax benefit to taxpayers, while still allowing them to meet their overall family financial needs.

If history is a good indicator, then what tax relief the government gives they can also take away. The United States first enacted the estate tax in 1797 and have been repealing, enacting and changing it almost every decade since. As a physician, in 2013, IS HAVING AN ESTATE PLAN IMPORTANT? Do you own your own business, then YES. Do you have significant assets in a 401(k) or IRA’s, then YES. Do you own a significant amount of life insurance, then YES. Do you want or intend to pass wealth to future generations, then YES. Do you worry about asset protection, then YES. Do you worry about protecting assets for and from your children, then YES.

Estate planning is more than the impact of the tax laws briefly discussed in this article, it is about providing the protection and peace of mind that is important to you and your family.

Securities Offered Through Securities America, INC.*Member FINRA/SIPC • Calvin R. Rasey • Registered Representative. Advisory Services offered through Securities America Advisors, INC.• A registered Investment Advisor Calvin R. Rasey • Investment Advisor Representative Securities America & its representatives do not provide tax or legal advice-Tax-law is subject to frequent changes; therefore it is important to coordinate with your tax advisor for the latest IRS rulings and specific tax advice, prior to undertaking and investment plan.

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