We are all aware that our federal debt and federal deficit have ballooned to record levels over the past 12 years. I believe no matter which political party is in power, taxes will be increased in order to maintain current government services and programs and high income taxpayers will continue to shoulder the burden in a number of ways. This will almost certainly include estate taxes.
It is an uncertain time for clients’ estate plans as some key tax provisions are scheduled to change at year end. These changes can have a significant effect on the transfer of your estate to your heirs. As many families prepare for a new estate tax environment, this is an opportune time to review the current tax laws , learn what changes are scheduled to be made in January of 2013 and determine what adjustments to your investments and overall wealth management plan you may want to consider with your team of advisors.
In January of 2013, absent further legislation,
the estate-tax rate will be 55 percent and the exemption only $1 million!
Federal Transfer Tax
Under the current 2012 gift and estate tax laws, you may transfer, either during life or at death, up to $5.12 million without paying gift or estate tax. This amount is called the exemption amount. Transfers in excess of the exemption amount are subject to tax at a 35 percent rate. In January of 2013, absent further legislation, the estate-tax rate will be 55 percent and the exemption only $1 million!
In addition to your annual $5.12 million lifetime gift tax exemption, you may gift $13,000 each year to one or more individuals, and a married couple may gift $26,000 to each donee. This annual gifting amount is called the gift tax annual exclusion. This annual exclusion is not expected to change in 2013 and will continue to be adjusted for inflation.
The current Administration supports an exemption for the estate tax of $3.5 million and a gift tax exemption of $1 million, while Governor Romney supports repeal of the estate and gift tax.
Oregon State Transfer Tax
The tax increases may not end with the federal government. Many state and local governments are facing severe budget deficits as well. The State of Oregon unquestionably faces its own fiscal challenges and is one of 14 states that impose their own estate tax in addition to the federal estate tax. Under current law, if you are an Oregon resident or own assets that are located in Oregon, and the combined value of your total estate (wherever located) is in excess of $1 million, your estate must file an Oregon estate tax return and pay Oregon estate tax. The tax rate varies between ten and 16 percent depending on the size of the estate. The tax applies to all of the assets that are in excess of the $1 million deduction. Oregon has no gift tax, so assets gifted prior to death will not be included as part of your estate for Oregon estate tax purposes.
Opportunities in 2012
Given the uncertainty about what might emerge regarding the Federal transfer tax system, it is possible that many planning opportunities that are currently available may not be available when the transfer tax system is addressed by Congress. Therefore, high net-worth families will need to consider whether to utilize some present planning opportunities before the end of the year when it is possible that these opportunities will disappear.
Utilize Lifetime Gift Tax Exemption
The current gift tax exemption of $5.12 million is at an all-time high. It is likely either by the indecisiveness of our polarized Congress or the implementation of the current Administration’s recommendation that this $5.12 million exemption may decrease in the future. If the lifetime gift exemption decreases, the opportunity will be lost to utilize the greater exemption amount that we currently have. Therefore, people with estates greater than $5.12 million should consider making gifts this year to take advantage of the $5.12 million lifetime gifting exemption.
The greatest benefit to gifting this year is to make gifts in excess of the amount that will qualify for the gift or estate tax exemption in the future. Therefore, gifts between $1 million and $5.12 million may be advantageous. This is so because any gifts made while you are alive decrease the amount that you may pass at death by reason of the estate tax exemption. Therefore, the advantage of lifetime gifting now is to give more away under the current gift tax exemption than will be available as an estate tax exemption when you die. For those that believe the Obama administration’s estate and gift tax rule may be adopted, the best gifting leverage will be obtained for gifts over $3.5 million and up to the lifetime maximum of $5.12 million.
There are a number of ways to take advantage of the lifetime gift exemption. The simplest is to gift directly to your children or grandchildren assets with a value of your full lifetime gift exemption of $5.12 million. Other alternatives include making gifts to your children or grandchildren through a trust. A trust can be established for each descendant and gifts made to the trust. You can continue to be the trustee of this trust so you can control how the funds are disbursed to your descendants. You cannot, however, retain any right to obtain the benefit of the assets that have been transferred to the trust.
Taking a long-term perspective still makes sense. Although it may not make sense to make drastic changes to your portfolio at this time, applicable families should review and revise their estate plans and documents in light of the changes to come. No client should assume that existing documents will meet their goals. I believe most probably won’t. I also feel that those who adopt a wait and see approach may find that they have defaulted to a wait and pay approach. I expect that our current ‘estate of confusion’ should have greater clarity come the New Year.
David Rosell is President of the Rosell Wealth Management in Bend. He is the Past President of the City Club of Central Oregon and a Past Chairman of the Bend Chamber of Commerce. David can be reached at 541-385-8831. Check out his newest financial videos at www.RosellWealthManagement.com.
Investment advisory services offered through Rosell Wealth Management, a State Registered Investment Advisor. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste 300 Akron, Ohio 44333-2431. 800 765-5201. Rosell Wealth Management is a separate entity from ValMark Securities, Inc.
This material is intended for informational purposes only and should not be construed as legal or tax advice, or investment recommendations. You should consult a qualified attorney, tax adviser, investment professional or insurance agent about the issues discussed herein.
