Death and taxes might be certainties, but the death tax is anything but certain. The estate tax, also known as the “death tax,” is in a state of flux. Until the end of this year, $5.12 million in assets is exempt from estate taxes, which affects only about 2% of American households. That level, however, is set to expire at the end of this year. If Congress does not act, the exemption automatically decreases to $1 million, and the number affected grows to about 12.5% of households, or 14.7 million. The tax rate is also scheduled to spike, from 35% to up to 55%. A lower exemption plus a higher rate equals a lot more tax due.
With proper planning, however, anyone can reduce or even eliminate estate tax. This is because current laws allow an individual to reduce the size of his or her estate by spending money on certain high-priority items (education and health care), giving to a spouse, giving to charity, or giving smaller gifts ($13,000 per person this year, $14,000 starting in 2013). However, until the end of the year, people can give up to $5.12 million to anyone without incurring any gift tax. This number is also set to drop to $1 million if Congress does not act. So, there is a very short window between now and the end of the year in which individuals with large estates can gift amounts to reduce or eliminate estate tax.
You might think there’s no way you could be affected, but it’s worth doing some math to make sure. Your gross estate includes the fair market value for every asset over which you have control — cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets.
Deciding whether to make a large gift starts with the non-tax issue of whether you will have more than enough money for the rest of your life, no matter what. Tax planning is great, but your own needs and protection is the first priority. In addition, once you decide a gift is appropriate, an attorney can advise you on the most beneficial way to make the gift. Gifts like these cannot be taken back, so we recommend consulting with your financial advisor, CPA, and attorney before acting.
Whether the exemption will drop to $1 million next year has been the subject of much speculation. After the election, a lame duck Congress will have about four weeks to take action. Given recent history of gridlock inWashington, many believe lawmakers will be unable to come to an agreement, and the $1 million level will be reinstated. A bipartisan group met late last week at Mt. Vernon to try to hammer out a deal to avoid the “fiscal cliff,” and the estate tax was supposedly on the agenda (one proposal mentioned extended the current exemption for ranchers and small business owners, but lowers it for other individuals).
Who takes the presidency in November could matter. Mitt Romney has repeatedly said he favors eliminating the estate tax altogether. President Obama supports an exemption in the $3.5 million range and a rate of 45%, which was the 2009 level. If Congress, as expected, remains split, with Democrats controlling the Senate, and Republicans retaining a majority in the House, a deal could be difficult. In short, no one knows how it will all shake out.
It’s hard to let go of assets, but for some people, letting go now could mean big savings later.