It is finally here, a permanent estate and gift tax law. Well, as permanent as a law can be given that laws can and generally do change over time. For now, estate planners can breathe a sigh of relief that at least for the foreseeable future, we have some level of predictability when it comes to the estate tax. So, this is what we know. Individual’s estates that are under $5.12 million (adjusted for inflation over time) fall under the basic exclusion amount and will not be subject to a gift or estate tax, which includes transfers of this total amount either during lifetime or after death. Exceeding that amount in transfers would trigger up to a 40% tax.
Also, married couples continue to enjoy the benefit of Portability, which allows for a widow or widower to utilize any unused portion of their deceased spouse’s exclusion amount. This basically means that a married couple can transfer up to $10.24 million estate and gift tax free. However, in order to preserve this right, the widow or widower must file a timely estate tax return and elect to preserve this right. A timely return must be filed within 9 months of date of death of the individual, with up to a 6 month extension. A common problem we see in our practice is that once one spouse passes away, the survivor often does nothing. Portability makes it even more important that a widow or widower seek legal and tax advice promptly after the death of their spouse. Because no law is ever really permanent, the exclusion amount could be reduced at a later date and the failure to elect Portability could be a major missed opportunity to save money on estate taxes. While the new, higher estate and gift tax exclusion allows for more families to avoid having to pay an estate tax, it does not negate the need for individuals to do good estate planning. In fact, the Portability provision makes it imperative that they seek qualified help and advice at the death of a spouse.
How will this impact our practice? Because the vast majority of my clients do estate planning to provide peace of mind for their loved ones rather than to avoid taxes, the new law will have little impact on their motivation. As far as the type of structure we use within the documents to address estate taxes, we will continue to build in provisions which provide the maximum amount of flexibility to address whatever changes come in the future. Finally, we will continue to focus on the non-tax protections available for the family that are often overlooked in traditional estate planning. Creditor claims, divorce, remarriage, spendthrift and other issues can be just as devastating to an estate as an estate tax bill so we will continue to address those in all of our estate planning documents. In conclusion, clients should be encouraged to pursue professional advice with estate planning for dealing with traditional issues and coping with the new law.