A well-worn maxim tells us that death and taxes are the only two things of which we can be certain. Under particular circumstances, we can also be certain that the occurrence of the former will trigger the latter. Everyone should be aware of the estate tax, but especially those whose estates stand to be diminished because they exceed a specified dollar threshold. Proper estate planning can help avoid unnecessary taxation.
A potentially wider range of people may have to address the estate tax next year, however. At the present, federal law provides for a $5,120,000 exemption from taxation. If an estate exceeds that limit, the rest is taxed at 35 percent. That exemption expires at the end of the year, and unless Congress passes legislation to extend or modify it, the estate tax exemption in 2013 will drop to $1 million. By contrast, the tax rate on the excess will rise to 55 percent.
This looming change has left some wondering whether giving away part of one's estate ahead of the end of the year might be a beneficial strategy. But people should be wary of potential gift taxes, which intersect with and influence a person's estate tax outcomes. The Tax Code allows people a lifetime "unified credit" that can exempt gifts up to a certain amount from taxation. How much of the credit a person has remaining depends on the value of gifts that person has previously made.
Some have suggested that a family limited partnership may be appropriate for people with certain types of assets they want to pass on to descendants. But in the end, an estate plan should be closely tailored to fit each person's individual circumstances while addressing potential tax consequences.
Source: Forbes, "Beating The Possible Estate Tax Increase Without Switching To Cat Food - The Midmill Dilemma," Peter J. Reilly, May 2, 2012.