In the flurry of fiscal cliff drama of early 2013, the estate tax situation became clearer, so we thought. In short, estates under $5 million would escape federal estate taxation, and lifetime gifting limits remained at that same amount. It was a surprisingly positive outcome on a tax issue which I was afraid would not escape scrutiny. As with all else in Washington, it remained only to wait until the winds changed to dash those hopes.
President Obama’s new budget proposal seeks a return to previous limits and tax rates. Specifically, the exemption limit would revert to $3.5 million, the top estate tax rate would increase to 45%, and lifetime gift limits would be reduced to $1 million. But what could all of this mean for you?
If you remember further back to the early 2000’s, you may recall a time when the federal estate tax was triggered for estates over $675,000. This quite often necessitated a complex series of trust planning to ensure that the maximum amount was sheltered for married couples, with adjustments for inheritance taxes imposed by states. In 2012, the exemption amount of $5 million, along with the ability to preserve a spouse’s exemption made much of that earlier trust work unnecessary.
But with the estate and gift taxes “back on the table” in budget negotiations, it can be difficult to know what, if anything, should be done to update your specific estate plan. Here are some considerations.
- If your estate plan ever included the various trust instruments necessary to minimize state and federal estate taxation, undoing them in favor of simpler instruments may be a mistake.
- If you have, or have been advised to consider gifting a portion of your estate to your heirs during your lifetime, you should revisit that now.
- Your annual financial checklist should always include a review of beneficiary designations for retirement accounts, insurance policies, and other investments. They should be updated not just to reflect changes in your family, but also to correspond with the latest versions of your estate documents.
As with investments, taxes, and retirement; estate planning strategies should be part of a larger perspective that brings all of the financial aspects of your life together.