Many readers know that Congress passed sweeping legislation on Dec. 17 that affected income and estate taxes. When Congress passed the tax law in December, all they did was defer another decision on this matter until 2013. Even though the exemption amount (the threshold used to determine if there is a taxable estate) was raised to $5 million, and the tax rate was reduced to 35% after 2011 and 2012, we get to listen to them play political football with the estate tax all over again. This means that depending on who is in the White House and what the temperature on Capitol Hill is at that time, and how the economy is performing, will determine whether your family business and lifetime savings will be eroded by a more aggressive estate tax.
Let’s face it: the estate tax is nothing more than a tax on savings. In the first half of your life, you accumulate assets and get taxed on your income. Then, as your income declines in your later years, the value of your assets climbs, potentially to a level where they could be taxed by the government. Using the current rules, if your estate (everything you own minus everything you owe) exceeds $5 million, you may have reason to worry.
This is particularly true if you own a business since most business owners are oblivious to how much their business is actually worth, and how much less it could be worth for estate tax purposes through the use of some simple planning techniques such as gifting, minority discounts and FLIPs (Family Limited Partnerships) that can often also provide desired asset protection.
For those who have done estate planning prior to Dec. 17 you should have your plans reviewed by a competent professional, especially if you have a traditional ABC trust design and most particularly if the funding of a Credit Shelter Trust is tied to the exemption. Since the exemption is now $5 million instead of $3.5 million, allowing it to remain unchanged may leave insufficient assets for a surviving spouse.
In summary, there are ways to mitigate the estate tax exposure through proper planning. A properly structured plan of attack can help to protect your hard earned assets and keep the family’s wealth where it should be: in the family.